‘Downside risks’ for the rest of the year, say economists
Generous government income supports and the Delta variant-fuelled fourth wave will continue to dampen Canadian employment for at least several months, according to economists at two Canadian banks.
“As we look ahead to the rest of the year, there are some downside risks to the Canadian labour market recovery,” TD Economics said in a report this week.
“With provinces further relaxing public health guidelines, and schools reopening, Canada could see a pickup in the number of people admitted to hospitals, which could prompt a revisiting of strategies.”
August employment tallies are due Friday from Statistics Canada. July’s report showed Canada’s jobless rate fell to 7.5 per cent from 7.8 per cent in June. Employment nationally was 1.3 per cent below the pre-pandemic level in Feb. 2020, while long-term unemployment was still 150 per cent or 250,000 people higher than historical standards.
National Bank of Canada noted a disconnect between an August poll by the Canadian Federation of Independent Business indicating 37 per cent of small businesses are hindered by a shortage of unskilled labour when the unemployment rate is above pre-recession levels and low wage earners were the worst hit.
“The generosity of income-support programs have been a disincentive to return to work,” National Bank Deputy Chief Economist Matthieu Arseneau said in a report this week. “With government having started to reduce its generosity in August and its programs slated to end by November, businesses should see some improvements in recruiting in the months ahead.”
Canada has a relatively high full-vaccination rate at nearly 68 per cent when compared with other advanced economies, and several provinces are adopting vaccine passports to lessen the need for widespread restrictions. Nonetheless, the Delta variant will continue to weigh on economic recoveries, TD and National Bank said.
“Even with these adjustments, rising caseloads threaten to prolong labour shortages, weaken consumer confidence and reduce business capacity, thereby slowing the recovery,” TD said in its report steered by Chief Economist Beata Caranci.
Likewise, National Bank points to global headwinds, including the diminishing effect of vaccines in the body over time. Yet, it praises Canada’s economic recovery as “enviable,” noting its gross domestic product (GDP), while contracting 0.3 per cent in the second quarter, was still the best nominally among G7 nations.
“It was not only companies that did well in Q2” from record corporate profits, Arseneau said. High levels of disposable income and household savings of 11.4 per cent of GDP “leaves consumers well-positioned to support the recovery,” he added.
Nonetheless, National Bank is lowering its 2021 GDP forecast to 5 per cent from 6 per cent to account for slackening growth.
“Easing of public health restrictions will allow decent expansion in Q3, but the rise of daily new COVID-19 cases puts more of a question mark over the outlook for the fourth quarter,” National Bank said. “Moreover, although we would consider consumers and businesses well-positioned to support a recovery, supply-chain disruptions like those of the auto industry present a risk under current conditions.”
TD was more optimistic, saying reopening measures will spur spending “with growth likely peaking in the fourth quarter,” but output will remain below capacity for months.
“Even with Canada’s peak growth yet to come, the level of economic output will be below its productive capacity, notwithstanding temporary supply constraints. Indeed, we anticipate the economy will remain in excess supply territory until the second half of 2022, when actual output will finally catch up to the economy’s potential.”
British Columbia was the only province to post employment in July higher than pre-pandemic levels, but restrictions re-imposed in early August as infections rose could dent that monthly total. Saskatchewan and Prince Edward Island showed the poorest July performance with employment 3.5 per cent less than pre-pandemic levels.
Still, Canada has outpaced labour force participation in the United States for the entire pandemic — about 65 per cent vs 61 per cent. “Helpful government policies, better handling of COVID-19, and higher vaccination rates likely contributed to the outperformance north of the border,” TD said.
StatsCan reported the economy added 94,000 jobs in July, primarily in the services sector as restaurants opened up, for example. However, the gain was only about half of what analysts expected.