The aggravating factors that could dampen a summer economic rebound

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The release of key economic data confirmed the recovery from the COVID-19 crisis went into retreat this spring as provinces tightened lockdown measures to combat a third wave of infections.

But rather than get hung up on the bad news, many economists instead focused on the receding threat posed by the virus to a vaccinated population, cautiously predicting a summer rebound as the economy reopens.

“My overarching thought is ‘on to June,’” Brendon Bernard, senior economist at Indeed Canada, a hiring website, said after sifting through the latest hiring data on June 3.

Statistics Canada’s latest Labour Force Survey was negative on the surface. Canadian employers cut 68,000 positions in May, the second consecutive monthly decline, nudging the unemployment rate to 8.2 per cent from 8.1 per cent in April.

Factoring in April’s losses, employers eliminated a combined 275,000 jobs when provincial governments moved to quash the most recent surge in COVID-19 cases, a greater overall decline than occurred during the second wave in December and January.

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Many economists had positioned themselves and their clients for a better result. A poll by Bloomberg showed that Bay Street economists had on average expected a loss of 25,000 positions, the statistical equivalent of a holding pattern. The latest hiring numbers, paired with Statistics Canada’s disappointing tally of gross domestic product in the first quarter, justify the Bank of Canada’s reluctance to reduce stimulus too quickly.

Bernard said he will be watching for how quickly consumers rush back to restaurants, non-essential retail stores, and providers of personal-care services as restrictions loosen. “Those are going to be the key industries to watch in the months ahead.”

Those high-contact and leisure industries have been the most severely impacted by government-induced containment measures. For example, the accommodation and food services sector has yet to recover nearly a third of the jobs it’s lost (364,000) since the pandemic began. The industry now accounts for nearly two-thirds of the overall employment decline (571,000) from February 2020.

“The road ahead isn’t so simple compared to some other areas where a relaxation of restrictions is probably going to lead to some immediate gains,” Bernard said.

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Retail, another high-contact industry, took a 1.4-per-cent hit last month with losses numbering 29,000 after the sector lost 84,000 positions in April.

Benjamin Tal, senior economist at Canadian Imperial Bank of Commerce, thinks those industries will be able to recover and attract back workers quickly, but it won’t be without difficulty.

Because Canadians benefited from government income support, which allowed them to accumulate savings, they’re itching to spend that cash on services.

“Where will it go? It will not go to goods because you already got your exercise bike,” Tal said, referring to the mountain of savings. “We have no problem getting goods. Just press a button. It will go to services and that’s where the pent-up demand is.”

However, employers in the retail and services industries tend to offer low wages, which Tal said could discourage employees, collecting $2,000 a month on government aid, from going back to the store. This, in turn, could pressure employers to raise pay, which might not be so bad, he added.

“I think overall it would be a good thing given the fact that we need to see income rising in Canada,” Tal said. “So an increase in wages would be okay as long as it’s not inflationary.”

If it does stoke inflation, Tal warned, the Bank of Canada could step in and raise interest rates, possibly pulling forward its current plan to leave borrowing costs low until at least 2022. That would have the effect of cooling the recovery.

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Tiff Macklem, the Bank of Canada governor, has made clear that he is extremely reluctant to get in the way of the rebound until he is satisfied the labour market has fully recovered. It could take more than a vibrant summer to make up lost ground.

Macklem has made a point of stating that he is aware of the impact job losses have had on visible minorities and women, especially when it comes to long-term unemployment. The term refers to people who have been unemployed for 27 weeks or longer. The May numbers show little change from April, holding steady at 478,000, but since the autumn of 2020, long-term unemployment has been near record highs and has been 166.8 per cent above pre-pandemic levels.

For visible minorities, 78.2 per cent held onto jobs compared to 84.6 per cent for non-visible minorities. These figures pre-date COVID-19. For women, labour force participation fell by just over half a per cent, but employment remained steady for both men and women.

“As we steer closer to the end of this recession, it’s worth remembering that for these groups, a revival of the status quo will mean once again coping with longstanding employment and wage gaps that placed them at a distinct disadvantage,” Rannella Billy-Ochieng, an economist at Royal Bank of Canada, wrote in a note.

If the labour market addresses these gaps, the Canadian economy could stand to benefit immensely, she highlighted in the report. “For instance, finding ways to better engage the skills of visible minority workers could boost GDP by close to $30 billion per year.”

But, Tal warned, we’re not in the clear yet, as the Indian Delta variant could potentially launch the country into a fourth wave and clobber all economic gains economists expect with the summer rebound.