This expanded edition of Economic Directions takes a deeper dive into the economic impacts of COVID-19: what we know so far, what we might see in the coming months, and what it all means for CUPE members.
Economic growth – The Bank of Canada estimates that Canada’s economy will shrink by 5.5 per cent in 2020 and rebound by almost 4.0 per cent in both 2021 and 2022. The economic recovery in the United States, Canada’s biggest trading partner, is far more uncertain, as the number of COVID cases continues to rise. Promising news from vaccine trials provides hope that a complete economic recovery is on the horizon, as the economic recovery is fully dependent on how well public health issues are managed globally.
Jobs – While there are significant differences across sectors and provinces and many laid-off CUPE members have not returned to work, overall, most of the jobs in the broader economy that were lost in April have been recovered. The remaining recovery is likely to be slow. Canada’s employment rate fell from 61.8 per cent in February to 52.1 per cent in April. By October, this measure had recovered significantly, and was up to 59.4 per cent. There are still 1.8 million workers unemployed and looking for work, and an additional 500,000 who want work but who aren’t looking because of economic conditions. Long term unemployment has increased dramatically, as almost half a million unemployed workers have been without work for 27 weeks or more.
Wages – The deep and dramatic impacts of this recession will affect bargaining, with public sector employers likely being especially reluctant to move on wages. Temporary top-ups for many essential workers have ended, even though private sector employers include some of the largest businesses that kept operating during the pandemic and became even more profitable. The need to recruit and retain more workers in child care, education and health care may result in long overdue wage boosts for these sectors.
Inflation – Overall inflation has been low, coming in at 0.5 per cent in September. The Bank of Canada expects inflation to remain low for some time, leaving significant room for governments to increase spending without causing excess inflation.
Interest rates – The Bank of Canada (BoC) expects to maintain its key lending rate at 0.25 per cent for an extended period, since inflation remains well below its target range of 1.0 to 3.0 per cent. The BoC has slightly reduced the size of its federal government bond purchasing program, but moved to purchasing longer term bonds. One of the BoC’s goals at the beginning of the pandemic was to ensure that the secondary market for government bonds, where investors buy and sell bonds from each other, continued to operate smoothly. The need for this was greatest in the market for short term bonds. Shifting to longer term debt will provide more economic stimulus per dollar, because it has a bigger impact on the borrowing rates that individuals and businesses are offered by commercial banks. This means that the BoC expects this change to provide at least as much economic stimulus as their previous actions. Government borrowing remains affordable, with 30-year federal government bonds selling at 2.0 per cent interest.