Unrealistic economic cheerleading is not a solution to a lingering COVID-19 crisis: Don Pittis


Pessimism doesn’t come naturally in the business world, which is perhaps why there was so much early enthusiasm for the idea of ​​a V-shaped recovery.Based on a graphical representation of the initial sharp decline in the economy, the V-shape, as opposed to W, U or L, was considered the most optimistic path.

The concept was that after a sharp drop to the bottom of the V caused by the novel coronavirus and the lockdown, economic activity would rebound right away as everyone returned to their old jobs and resumed spending.

Even with hindsight, it is not entirely clear that governments could have orchestrated this perfect recovery. Clearly some – including our neighbor to the south – could have done a much better job.

Economic chain reaction

As we await the latest Canadian trade figures and new jobs data for the United States and Canada this week, a strong recovery looks increasingly unlikely, as a chain reaction of grim events reverberates in the Canadian and global economies.

And while Canadian leaders can be praised for bringing COVID-19 under control and fixing some of the worst cracks with the bailouts, it is becoming increasingly clear that the outbreak is inflicting longer-term damage – damage we could. start to see trade figures on Wednesday. .

The first evidence of a decline in trade was reported by David Parkinson in The Globe and Mail last week, when he drew attention to the fact that revenue in tonne-miles – a potential indicator of trade – at CN and CP Rail were down 16%. and 12 percent, respectively.

In a globalized economy, no country is alone. And with the United States our biggest trading partner, it’s hard not to blame – as US Federal Reserve Chairman Jerome Powell did last week – the US failure to stop the spread of disease.

The Fed chairman warned that the new surge in the United States, which is now moving from the Sunbelt states to the Midwest, will continue to weigh on the economy. As the central bank “plans for the worst,” Powell said, businesses would eventually reopen.

“But there will probably be a long tail where a lot of people have a hard time getting back to work,” he said.

This is one of the reasons economic forecasters don’t forecast the same big July jobs rebound that we seen in June data.

But even though Canadian economic growth broken in may, recouping almost half of his losses, there are more and more signs that the second half of the year will be much more difficult. A second wave prediction disease in Canada will not be the only thing holding back a recovery.

The pandemic led to the fall of dominoes

In the aftermath of Powell’s bleak outlook, news came that the U.S. economy had contracted by 33%, biggest reduction ever, making it increasingly clear that the dominoes had started to fall and that Powell’s long tail would apply to more than just jobs.

Much like the viral contagion that started the process, parts of the economy that we consider to be quite disparate have connections that lead to transmission in a vicious cycle. What we have seen is that the government trying to stem the tide by injecting liquidity into markets, businesses and housing – and into the pockets of the unemployed – simply cannot fill all the gaps.

Six months ago, when we thought the novel coronavirus could be largely contained in China, economists were already warning of the severity of its impact. would depend on how long the epidemic – it has not yet been labeled a pandemic – has lasted.

Masked Brazilians played dominoes last month in the capital, Brasilia. Economic downturns in countries hard hit by the virus have led to contagion from reduced global trade. (Adriano Machado / Reuters)

Three months ago, independent real estate analyst Ben Rabidoux suggested that house prices would suffer very little if the crisis ended quickly – a deadline he set less than six months. Compliance with this deadline now seems unlikely.

In May, tax historian Shirley Tillotson noted that the previous crises that governments soon expected extension or even aggravation. And while acknowledging that excessive pessimism could make matters worse, the US response to the pandemic has been a lesson that unrealistic cheerleading can have a more disastrous effect.

The end, or reduction, of income support programs in the United States may be aimed at forcing people to return to work. But as Powell suggested, those jobs no longer exist.

The list of bankruptcies is long, including in the retail trade, a large employer on both sides of the border. And while creditor protection allows some of these businesses to resume operations, as DavidsTea announced last week, the creditors will be chargeable.

The 18 Canadian stores of the tearoom, downsizing of nearly 200 before the pandemic, jobs will disappear and the rest of the storefronts will be looking for new tenants.

Situation far from hopeless

Canadian construction giant Bird Construction’s purchase of No.3 builder Stuart Olson could keep his projects alive, but it almost inevitably will. lead to a reduction in jobs since most of the money went to pay off the accumulated debt. Stuart Olson and DavidsTea are just two recent examples of how one thing led to another during this economic decline.

A decline in oil exploration, a decline in immigration, and perhaps worse – the danger of growing political divisions in the United States – will compound in damage to other parts of the economy.

In Canada, it seems scandalous that the WE Charity controversy has diverted so much attention from the essential task of developing long-term strategies to rebuild a shattered economy.

But the problem is far from hopeless. Before the pandemic, full employment and, in many sectors, a glut of production were challenges for new businesses and new growth.

The wisest governments around the world are now putting political wrangling aside and, while temporarily supporting the economy, strategizing to use slack economic capacity as raw material for the next recovery.

Follow Don on Twitter @don_pittis


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