The pandemic exposed flaws in Canada’s economic system. Fixing them won’t be easy

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After a year of living with COVID-19, Postmedia is taking an in-depth look at the significant social, institutional and economic issues the pandemic has brought to light in Canada — and more importantly, how we can finally begin to solve them. You can find our complete coverage here.

Statistics Canada recently released its final tally of the economic output of the sports and entertainment industry in 2019. Did we ever have fun, in those pre-pandemic days!

The first championship by Toronto’s National Basketball Association franchise helped push the contribution of “spectator sports, event promoters, artists and related industries” to Canada’s overall gross domestic product (GDP) to $10.5 billion, the most ever.

The fun didn’t last, of course. Kawhi Leonard, the hero of the Raptors’ playoff run, left to play in Los Angeles. Then, in March of 2020, the virus that causes COVID-19 swept into North America, bringing death, economic destruction and an abrupt end to frivolity.

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“You had to really shake your head and decide how serious is this,” Chris Fowler, chief executive of Edmonton-based Canadian Western Bank, said while reflecting on the early days of the pandemic. “When they started to cancel the NHL and the NBA, you were like, ‘Whoa!’ It punctuated the worry of it.”

It says something about us that the COVID-19 crisis only got real when we were denied access to non-essential pursuits.

Navdeep Bains, the former industry minister who oversaw the gargantuan effort that was required to jumpstart domestic production of masks, ventilators and other essential equipment, said in an interview that the big lesson for him from the past year is “resiliency.”

That’s a polite way of saying that we had grown too comfortable, making us blind to how fragile the economy had become. Our chronically underfunded health-care system was no match for a mysterious and deadly virus. To protect hospitals, we shut down the economy, wiping out a decade’s worth of job growth in a single month. To protect the economy, governments borrowed as if they were fighting a war, which in many ways they were.

The effort, so far, has gone better than many expected. An epic economic collapse has been partially offset by an almost-as-epic recovery. In January, the Bank of Canada assumed that the second wave of COVID-19 infections would cause GDP to contract again the first three months of 2021. Instead, it looks like the economy grew at an annual rate of around six per cent, according to the Bank of Nova Scotia’s real-time forecast.

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It’s too soon to draw conclusions from what we’ve been living through for the past year, but it’s clear that some of the most important assumptions we had about the economy need to be reconsidered. The surprising strength of the rebound is the result of adaptation, not necessarily resiliency. If the latter is the goal then changes will be needed.

At first, we struggled to find masks, medical gowns and other personal protective equipment, and then we found ourselves near the back of the line for vaccines, because we had allowed our manufacturing capacity to erode. “There’s not a lot of manufacturing left in Canada,” Greg Hicks, chief executive of Canadian Tire Corporation Ltd., told Bloomberg News in March, a comment on the extent to which we have sacrificed self-sufficiency for cheap goods from Asia, Mexico and the United States.

Canada’s full embrace of the free-trade era, starting with the Canada-U.S. Free Trade Agreement in 1989, contributed to the shrinking of our manufacturing base. The other policy priority from that time — balanced budgets — resulted in a strained health system and a safety net so tattered that the federal government felt compelled to send the suddenly unemployed $2,000 cheques and subsidize the payrolls of tens of thousands of companies to keep them from firing people.

It was the right response, but a sign of weakness, not strength. “Our basic needs have to be thought through,” Mark Barrenechea, chief executive of Waterloo, Ont.-based Open Text Inc., one of the country’s biggest digital technology companies, said in an interview.

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Ali Reyhany, founder and chief executive of Care Pharmacies, a Toronto-based group of independent drug stores, offered a more blunt assessment. “Everyone in the world is looking to solve the same problems,” he said. “If you take this type of beating, government, and you don’t fix it? I don’t know what to tell you.”

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Canada’s GDP shrank 5.4 per cent in 2020, more than in 2009 (the Great Recession) and 1982 (stagflation).

But aggregate numbers like that don’t really tell the story.

Recessions typically punish goods producers. A downturn might prompt automobile makers to idle production, which in turn makes life difficult for their suppliers. But other sectors will muddle through until the economy recovers. Consumers continue to visit hair salons, restaurants and shops, although maybe not as often.

The COVID recession was different. The pandemic flattened restaurants, entertainment and tourism — corners of the economy that typically avoid the worst when the economic cycle turns. The production side of the economy actually did ok. Agriculture and mining made the list of essential services. Factories and construction sites were permitted to reopen relatively quickly. Meanwhile, accountants, coders, writers and other white-collar service workers simply plugged in from home rather than the office.

That dynamic caused some perverse outcomes. Consider employment in a category of companies that Statistics Canada calls “computer assisted design and related services.” The payrolls of those firms surpassed their pre-pandemic level in September and had increased by more than 13,000 positions as of January.

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Yet there still were about 373,000 fewer people working at bars and restaurants. The contrast is a miniature portrait of systemic unfairness and inequality that was exposed by the crisis. The hardest hit were also the most vulnerable. Coders and the like earn an average of about $1,700 per week, four times as much as the typical server or bartender makes. Technology industries are dominated by men, while women and younger people make up the majority of workers in frontline services.

“We exposed all the weaknesses in the economy for women,” said Jennifer Reynolds, president of Toronto Finance International, an agency that promotes Canada’s biggest city as a top banking centre. “COVID put a spotlight on the problem.”

Those fissures informed Ottawa’s response to the crisis. The rescue effort that followed the 2008-09 financial crisis favoured bankers and industrial companies via the bailout of automobile makers and subsidies for construction. This time, households and smaller companies were first in line for help.

The Bank of Canada quickly dropped the interest rate on which commercial banks base their lending to 0.25 per cent, about as close to zero as policy-makers think they can safely go, and used its unique power to create money to become a major buyer of corporate and government bonds, allowing it to put even more downward pressure on the cost of borrowing. Tiff Macklem, the governor, also has indicated that he intends to leave the benchmark interest rate near zero until at least 2023.

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Ultra-low interest rates and a flood of cash risk stoking inflation. It’s a risk Macklem is willing to take for now. He hinted in a speech earlier this year that he thought it might be possible to push the jobless rate lower than its pre-pandemic level of around 5.5 per cent without causing prices to spike. (The jobless rate was 8.2 per cent in February, down from its COVID crisis peak of 13.7 per cent in May.) The experience of other central banks shows prices are more anchored than experts previously thought. That means the central bank can let the economy run hot in order to speed up the recovery and pull those marginalized workers back in the economy.

“We’re going through an incredibly unique economic cycle, like nothing we’ve ever experienced,” Macklem said in an interview. “We need to both understand how inequality and unevenness is affecting economic outcomes and we have to understand how our policies affect unevenness and inequality.”

We need to both understand how inequality and unevenness is affecting economic outcomes and we have to understand how our policies affect unevenness and inequality

Tiff Macklem, governor, Bank of Canada

Prime Minister Justin Trudeau’s response was even more extraordinary.

His predecessor, Stephen Harper, showed a certain amount of restraint when he confronted the Great Recession. He did enough, but there was never any doubt that he intended to balance the budget as quickly as possible. He did so, just before losing the 2015 election to Trudeau’s Liberals.

The intellectual consensus about the risk posed by government debt had changed by the time the pandemic forced the closure of the world’s biggest economies. The bias towards prudence shown by countries such as Canada, Germany and the United States a decade ago had come to be seen as the reason the recovery was so frustratingly slow. Some prominent economists had become convinced that governments needn’t worry too much about debt, as long as the economy grows at a rate faster than the cost of borrowing.

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Trudeau took that information and went all-in. The Finance Department reported a deficit of $268.2 billion between April and January, compared with a shortfall of $10.6 billion over the same period a year earlier. Revenue was about 15 per cent lower, while expenditures surged 84 per cent to cover CERB, the wage subsidy and various other patches in the existing safety net.

Net debt was about $993 billion at the end of January, compared with about $721 billion at the end of March 2020, the close of the federal government’s previous fiscal year.

The prospect of a $1-trillion debt makes many people uncomfortable. Fowler of Canadian Western Bank said governments’ current level of borrowing is unsustainable and could require higher taxes to get it under control. His comments show that there are pockets of resistance to the theory that debt can be eroded simply by ensuring that growth is faster than the government’s cost of borrowing.

Still, the Alberta banker stopped short of saying Trudeau was reckless. In fact, the business community, which typically insists on fiscal prudence, is all but universal in its praise of the aggressiveness of the government’s response. Executives have issues with choices and execution, but they aren’t worried about the debt. The history of economic crises, including the Great Depression, shows they were worsened by governments doing too little. For once, authorities opted to err on the side of doing too much.

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“It was very important for governments to proceed quickly,” Monique Leroux, vice chair at Fiera Capital, a Montreal-based investment firm, said during a virtual conference hosted by the Canadian Chamber of Commerce in February. “If we go back to 2008, it took a while for governments to move forward and it was very difficult. So, I think that part was well done in Canada and in other countries.”

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There almost certainly will be unintended consequences, but it’s unlikely that any of them will be worse than the disaster we were facing at this time a year ago. The Toronto Stock Exchange went into Easter weekend at a level that was 60 per cent higher than its pandemic-induced trough. Stock prices reflect a multitude of variables, but an important one is confidence in the future. The markets are telling us that things are better than they feel.

“In hindsight, we reduced our staff too much,” said Greg Engel, chief executive of Organigram Inc., a Moncton, New Brunswick-based producer of cannabis products. “The demand continued to grow.”

Engel started 2020 with a staff of about 800 people. The lockdowns forced Organigram to kill plants because it was effectively impossible to process the harvest. Half the staff accepted voluntary layoffs. In August, the company made half of those departures permanent. The forced stop in the spring had a lasting effect. Demand is worthless without supply.

“You just can’t flip a switch and start scaling and growing cannabis again,” Engel said. “We didn’t have enough product to package.”

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By December, a new crop of cannabis was ready, although still not enough to keep up with surging orders. Engel started bringing people back, and he’s now restored about 130 of the positions he axed last year, putting Organigram’s headcount at about 600.

However, staffing at Organigram probably won’t grow much higher for now, even though demand remains strong and Engel anticipates it will get even stronger. That’s because the lockdowns forced him and his lieutenants to come up with ways to keep up with orders with fewer people. They added automation and devised more efficient production methods. Those innovations promise to make Organigram more profitable. They’re here to stay.

“If there is a positive from COVID, and I don’t want to say there has been a positive because it has had a detrimental impact on the world and on a lot of people, but it did force us to look at efficiency,” Engel said in an interview. “With fewer people, we are able to get more output within the facility.”

You want companies to be in good shape once the recovery arrives. The growth that followed the Great Recession disappointed because there were too few companies left standing in the immediate aftermath to take full advantage of the surge in global demand. That might not be as big an issue this time. Insolvencies spiked in 2008 and 2009. In contrast, the bankruptcy rate plunged in 2020, and even though it has picked up this year, it remains well below pre-pandemic levels.

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But as the example of Organigram shows, a foundation of healthy companies doesn’t necessarily mean that employment will be quickly restored. The crisis has accelerated a shift to a digitally oriented economy that will present employers with opportunities to replace humans with software power by artificial intelligence and various state-of-the-art machines. That means the unemployment rate could remain elevated, which will make it harder for governments to work off their debts.

The fear of being replaced by technology also could add to the anxiety being felt by a labour force that already is coping with high levels of stress and burnout.

Three million Canadians were working from home in January, according to Statistics Canada. Their bosses might be pleasantly surprised with the results: a third of those workers feel they are more productive, while about 60 per cent say they accomplish just as much at home as they do at the office, the agency said in a study published on April 1.

However, there’s reason to think that full-time telework is bad for our health. Thirty-five per cent of the new teleworkers have replaced their commutes with longer hours, Statistics Canada said. The extra effort is exacerbating stress levels that were high before the pandemic, and have been pushed even higher by the isolation and strangeness of the past year, Jennifer Moss, author of The Burnout Epidemic, said at a virtual conference hosted by the Conference Board of Canada on April 2.

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It’s an unfamiliar variable that will affect the recovery. Delvinia, a fast-growing research and data firm in Toronto, was working at 150 per cent capacity at one point last year as companies grasped the importance of digital information. Founder and CEO Adam Froman’s staff struggled to keep up. Some burned out. Some quit. It wasn’t as simple as beefing up mental-health benefits because it was nearly impossible to get an appointment with a psychologist or therapist.

It’s not about foosball tables anymore, or paid lunches. You need a culture that can survive a pandemic

Adam Froman, founder, chief executive, Delvinia

“Last year is going to be considered one of the greatest learning years for companies about how to manage, not through a pandemic, but just how to manage,” said Adam Froman, founder and chief executive of Delvinia, a Toronto-based research and data firm. “It’s not about foosball tables anymore, or paid lunches. You need a culture that can survive a pandemic.”

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Life-altering moments tend to be followed by significant change. The Second World War showed that government could get things done when it wanted, and politicians used that momentum to put in place many of the programs that we now take for granted. Overreach in the 1970s led to high inflation, high interest rates and high unemployment, setting in motion a partial dismantling of what was built after the war. The Great Recession triggered a new resolve to constrain the biggest banks, which ensured the financial industry had big reserves of cash with which to confront the latest economic crisis.

COVID-19 will bring similar structural change. Governments won’t have to do all the work. Reyhany, the pharmacist, raised about $40 million by listing his company’s online pharmacy business, Mednow Inc., on the TSX Venture Exchange in early March. The pandemic has made investors keen to get behind both health and technology companies, and Mednow offered exposure to both. Open Text’s Barrenechea said he’s in the process of hiring about 300 people in Canada, and for the first time, location isn’t an issue because the pandemic has shown that companies like his can function without an office. “Modern work works,” he said. “We’re embracing it.”

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The other force that will push Canada out of the recession is the response to climate change. Global pledges to neutralize carbon emissions within a few decades have reached a critical mass, and they are increasingly backed by policy, such as a carbon tax in Canada and U.S. President Joe Biden’s decision to block the Keystone XL pipeline from Alberta. The policies remain controversial, but after a decade of promise, green energy’s moment appears to have arrived. “For all of these years, we’ve been working so hard, and it’s all coming together now,” said Kirsten Marcia, chief executive of Saskatoon-based Deep Earth Energy Production Corp, which last month completed a successful test of what could be Canada’s first geothermal power project. “This is our year.”

So, the recovery has a tailwind. That means the worst probably is behind us, although a third wave could complicate matters.

But as the economy starts to feel better, it will be important to resist confusing relief with victory. The recession was devastating because we were vulnerable and those vulnerabilities haven’t been fixed. All we’ve done to date is apply very expensive Band-Aids.

“What the pandemic did was show all the warts in the system,” said Delvinia’s Froman. “There was no hiding.”

Financial Post

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