The COVID-19 pandemic has created a global economic crisis. Containment measures to prevent the viral spread include physical distancing, closing schools and non-essential businesses, as well as travel and border restrictions. These necessary life-saving measures are severely limiting economic activity and have rapidly pushed the global economy into what’s likely the sharpest and most synchronized downturn since the Great Depression.
This pandemic is first and foremost a human health tragedy. The economic impacts ultimately depend on the viral spread, as well as the unprecedented policy actions to maintain liquidity for financial markets, households, and businesses until the outbreak is brought under control and containment measures ease.
COVID-19 struck at a bad time. The global economy was already faltering due to trade tensions that weakened manufacturing, trade, and business investment. If trade wars and COVID-19 weren’t bad enough, on March 7, an OPEC+ agreement broke down after a dispute between Saudi Arabia and Russia over oil production levels. Falling demand due to COVID-19, combined with vastly increasing supply from this dispute, have dramatically reduced global oil prices. This will have an outsized impact on Canada’s economy, as Alberta’s producers have been hit harder than many others. The price of Western Canadian Select oil is down more than 80% relative to a year ago, falling well below break-even profit levels.
Financial markets have been reacting in real time to developments. As investors search for safe assets, we’ve seen significant drops in equity values, see-sawing volatility, increased borrowing costs, and reduced access to liquidity, especially for emerging markets and businesses considered below investment grade.
It’ll be a few months until official gross domestic product (GDP) statistics are released, but higher-frequency indicators for March are starting to reveal the true extent of the unfolding damage. They show stunning declines in purchasing managers’ indices and record spikes in unemployment claims. If they materialize, the risk of business bankruptcies and job losses threaten to have more persistent impacts, even after the pandemic has passed.
The EDC Economics team has provided an initial assessment of the potential sectoral fallout in Canada as a result of COVID-19. We find this shock is posing unprecedented economic challenges, which we expect to be faster and more broadly dispersed across sectors than the global financial crisis of 2008-2009.
We should emphasize our analysis applies at the consolidated sector level; in all sectors, there’ll be a wide range of company experiences.
Although most of the 17 sectors considered in our report are expected to face considerable economic disruptions and working capital pressures, the following are particularly vulnerable:
- Oil, gas and cleantech are dealing with a double-whammy of the COVID-19 and oil price shocks, combined with low profitability and high levels of borrowing.
- Wide array of services due to business restrictions that will greatly reduce supply, while physical distancing measures limit person-to-person contact and severely restrict demand. This is a key distinguishing feature of the COVID-19 crisis—unlike past recessions where services were the most resilient part of the economy. The COVID-19 shock hits many service sectors that have short payment cycles, thin profit margins, limited financial buffers, and high leverage. There are particular concerns for: accommodation and food services, entertainment and tourism, personal services, and information and cultural industries.
- Transportation: Airlines will be significantly impacted due to travel restrictions that have sharply reduced activity.
- Manufacturing has a significant economic footprint and is highly trade-intensive. On the demand side, high-value, capital-intensive products are often hit hardest in recessions, as consumers and businesses delay these purchases. On the supply side, industries with complex supply chains may be unable to access key inputs, making it difficult to complete production runs. In fact, we’re already seeing temporary factory shutdowns in areas such as autos, aerospace and related parts suppliers.
- Agriculture, forestry and fishing exporters: Although domestic sales appear to be holding up reasonably well, there have been reports of shipment problems for some exports.
- Retail trade: This will be a very difficult time for most brick-and-mortar retail, and will rapidly accelerate the shift to online sales. Smaller businesses are likely to be hit especially hard.
- Real estate and leasing could face heightened financing pressures due to high borrowing and leverage, primarily related to mortgages. With household debt already at high levels before the crisis, households will face increased financial stress after the virus has passed, which could restrain housing markets and negatively affect mortgage finance.
Conversely, our analysis finds that a few sectors are better positioned to weather the storm, including:
- Health, education, social services and public administration due to increase demand for critically-important health-care services; despite school closings some activity continues online; more generally, such public sector jobs are generally better insulated than other sectors.
- Professional, scientific and technical services where a highly-skilled and educated workforce may be able to shift more seamlessly to work-from-home arrangements and continue providing services online (such as legal, accounting, engineering, consulting, R&D, public relations and advertising).
- Utilities: Reduced usage is expected, but utilities operate on longer payment cycles, and had higher initial profits going into the crisis;
- Mining: dealing with depressed metal prices, but has stronger working capital buffers, high profit margins, and limited leverage.
Digging below the national results, we expect negative effects across the country. However, Alberta, and Newfoundland and Labrador, and to a lesser extent Saskatchewan, will likely be hit hardest due to their greater sensitivity to global commodity prices, which have tumbled alongside COVID-19 disruptions.
Such extraordinary economic challenges call for extraordinary measures to prevent a business liquidity crisis in Canada. The Government of Canada and Export Development Canada (EDC) are stepping up to help Canadian businesses in this difficult time. For example, EDC’s capacity to help Canadian entrepreneurs expanded under the $65-billion federal Business Credit Availability Program (BCAP). This program allows EDC to offer Canadian businesses of all sizes the credit they need during the COVID-19 pandemic. We’re working with the Business Development Bank of Canada (BDC) and private sector lenders to ensure Canadian companies get support during these uncertain times.
For COVID-related queries and answers to your exporting questions, please visit our Export Help Hub.