GDP and employment are set to fall by more than we previously expected in the first half of the year. Even allowing for a stronger rebound in the second half, we now forecast an 8% drop in GDP for 2020.
- GDP and employment are set to fall by more than we previously expected in the first half of the year. Even allowing for a stronger rebound in the second half, we now forecast an 8% drop in GDP for 2020.
- March’s Labour Force Survey (LFS) and the nowcast produced by StatsCan showed that the coronavirus outbreak and restrictions on activity hit the economy faster and deeper than we initially expected. The LFS showed a slump of employment of 1.01 million, or 5.3%, and a plunge in hours worked of 15%. (See Chart 1) Based on this data and other factors, the nowcast points to a 9% m/m drop in GDP in March (see Chart 2), which would result in a quarterly contraction of 10.5% annualised. That is much weaker than our previous forecast for a contraction of a less than 3% annualised.
- The restrictions have left no sector untouched. It was not surprising that customer-facing service jobs accounted for most of the 1.01 million drop in employment, with accommodation, food service and retail jobs down by 506,000. But the scale of losses in other sectors was striking, with education, health and social care positions falling by a combined 225,000. (See Chart 3.) The falls in hours worked were even deeper and more broad-based. (See Chart 4.)
- Our forecast that employment would fall by two million in total, or 10.4%, was seemingly not pessimistic enough either. Six million people have apparently now applied for Employment Insurance (EI) or the Canada Emergency Response Benefit (CERB). Media reports suggest some people have applied incorrectly, either because they are still working sharply reduced hours and so are not eligible for the schemes, or because they incorrectly applied for both. On top of that, some of these people, for instance those that are self-employed (who normally make up 16% of employment), will still count as employed in the LFS even though they did not work any hours and are therefore eligible for financial aid. Nevertheless, even allowing for those factors, April’s Labour Force Survey is likely to show a decline in employment of three million.
- The official number of unemployed is unlikely to rise by as much. Those that are temporarily laid off count automatically, but those that are permanent job losers are only deemed unemployed if they look for a new job. In March, unemployment rose by “just” 413,000 because 93% of those who were permanently laid off did not look for work. They therefore dropped out of the labour force, which caused an unprecedented slump in the participation rate. (See Chart 5.) Of those 525,000 people, 193,000 said they wanted a job but did not look due to poor business conditions and 265,000 said they did not want a job or were not available, perhaps due to self-isolating. (See Chart 6.) Judging by March’s figures, and as firms remain closed, if employment drops by three million in April’s LFS, then unemployment would rise by around 1.5 million, pushing the unemployment rate up to 17%, which is higher than our earlier forecast of 15%.
- GDP is set to fall much further in April as well. As most restrictions were enforced from the middle of March, the StatsCan nowcast suggests that their total effect would be to cause a decline in GDP of 18%. But some restrictions, such as those on construction, were tightened at the start of April and StatsCan said that its nowcast did not yet show a hit to activity in the oil sector. That contrasts significantly with reports that many producers have now slashed their output. Taking these factors into account, we are pencilling in an additional 5% hit and expect a total fall in GDP of 23% from February to April. Even assuming that some firms are allowed to re-open again in the second half of May, our estimates imply GDP will contract by 45% annualised in the second quarter, compared to our prior estimate of a 35% contraction.
- The better news is there seems to be scope for a quick reversal of much the slump in activity that we did not fully anticipate, such as in non-essential healthcare and personal care services. So for now we are sticking to our forecast for fourth-quarter GDP. That implies a stronger recovery in the second half of the year, but we still expect fourth-quarter GDP to be 4.5% lower than a year earlier and the new quarterly profile implies that GDP will fall by 8.0% this year, down from our prior forecast of -5.3%. (See Chart 7.)
- There is clearly a huge amount of uncertainty surrounding these forecasts, which was perhaps best demonstrated in the Bank of Canada’s Monetary Policy Report published yesterday. Rather than producing point forecasts, the Bank provided a range of possible outcomes in a fan chart. In its best-case scenario, GDP ended the year 23% higher than in the worst-case scenario. (See Chart 8.)
Chart 1: Employment & Hours Worked
Chart 2: Monthly GDP (% m/m)
Chart 3: March Change in Employment (000s)
Chart 4: March Change in Employ. & Hours (% m/m)
Chart 5: Participation Rate (%)
Chart 6: Reasons for Lay-offs & Drop-outs (000s)
Chart 7: GDP (% y/y)
Chart 8: Bank of Canada Fan Chart for GDP ($bn)
Sources: Refinitiv, StatsCan, Bank of Canada
Stephen Brown, Senior Canada Economist, firstname.lastname@example.org