BDC Economic Playbook: COVID-19 Business Recovery Scenarios

BDC PREDICTION: The sharpest economic contraction of our lifetimes will be followed by an uneven recovery

COVID-19 has undoubtedly landed a major blow to our economy. Recently released statistics highlight the magnitude of the shock. As the infection curves appear to be flattening, provinces have begun to announce plans to ease containment measures. This report released by the BDC reviews the most recent data on the Canadian economy and provides a snapshot of what the recovery might look like.

Looking back to a healthy economy

Statistics Canada engaged in an unusual exercise last month. The agency provided an estimate of Canadian GDP in March before releasing its estimate for February.

The purpose of this early projection was to try to provide an initial look at the size of the shock following the lockdowns in mid-March. The diagnosis confirmed the economists’ fears. A reduction of nearly 9% in economic activity for the month and 2.6% for the first quarter as a whole. Statistics Canada will revise its estimate at the end of May.

By contrast, the economic picture had been relatively positive in February. Although the economy wasn’t growing, the situation was mainly due to temporary factors—strikes in Ontario, rail disruptions and a reduction in flights from areas already affected by COVID-19.

Despite these events, the economy had grown by 2.2% over the past year. This was a fairly satisfactory performance given trade tensions in recent years and long duration of the economic expansion to that point.

Measuring the extent of the damage

The state of the economy in February 2020 will serve as a measuring stick for the quarters—or years—to come. It will be the level of economic activity that needs to be reached in order to affirm the crisis is largely behind us.

The dimensions of the crisis that hit the economy in March is beginning to be confirmed. Employment data in March were catastrophic—one million jobs lost and an unemployment rate of 7.8%. But even those figures underplay the magnitude of the shock because they didn’t yet reflect the widespread effects of lockdowns across the country. Indeed, the data for the week of April 12 were even worse. 1,993,800 additional jobs were lost, pushing the unemployment rate to 13%, a peak dating back to 1982.

The damage to businesses caused by containment measures is also becoming clearer. According to Statistics Canada, almost half (45%) of firms that reduced their workforce laid off at least eight of 10 employees. Accommodation and food services were the hardest hit. Almost 70% of businesses laid of 80% or more of their staff. More than half of businesses in retail, the arts and health care sectors also laid off more than 80% of their workers.

Jobs more favourable to telework were less affected but not immune to disruption. A quarter of the firms in the professional, scientific and technical services sector that laid off workers also reached the 80% threshold.

So why did the unemployment rate only rise to 13%? The reason is that containment is hitting small and medium-sized businesses disproportionately hard because they face greater liquidity challenges. The new unemployed (which we hope will be temporary) come disproportionately from smaller businesses, with no less than 75% of companies either partially or totally reducing their activities since March, according to a BDC survey.

What will the recovery look like

The same BDC survey indicates that 28 per cent of Canadian entrepreneurs believe it will be difficult to return to a normal level of activity in less than a month. Weak demand for products represents the greatest risk.

This may be a well-founded concern. Early data from China show that demand has been slow to recover, despite the lifting of containment measures. Chinese consumers remain cautious in response to the COVID-19 crisis and the same trend is likely to occur in Canada.

These are four different scenarios for the economic recovery that entrepreneurs face, depending on their sector of activity.

V-shaped recovery implies a significant rebound that brings activity back to previous peaks relatively quickly. The manufacturing and construction sectors are good candidates for this kind of rebound because they lend themselves well to physical distancing, as evidenced by their recovery in Europe and Asia.

U-shaped recovery is characterized by slower progress that takes activity more than a year to return to pre-crisis levels. This scenario seems more likely for sectors requiring a return of consumer confidence. Preliminary economic information from China and Europe indicates that this could be the case for the retail and restaurant sectors.

An L-shaped recovery is the worst-case scenario. It indicates a timid rebound and a level of activity below pre-crisis levels for several years. Businesses in the tourism and consumer events industry could unfortunately follow this path.

A resurgence of COVID-19 cases later in 2020 or 2021 may finally cause a W-shaped recovery for most companies. The three major pandemics of the 20th century were characterized by more than one wave of outbreaks.

The scenario we consider most likely for the Canadian economy as a whole is a cross between the V and U forms. The recovery is expected to be slower overall than a V-shape, but with enough industries showing signs of strength to avoid a painful U-shaped scenario.

What does it mean for entrepreneurs?

The recovery will be gradual and uneven. This has important implications for Canadian entrepreneurs.

  1. Your supply chain may recover with a lag. Before you resume operations be sure to contact your suppliers to minimize bottlenecks.
  2. If you consider a V-shaped recovery unlikely for your business, keep a close eye on your cash flow and stay up-to-date on assistance programs offered by the Government of Canada and BDC.
  3. According to our estimates, 55% of customers have increased their online purchases since the beginning of the crisis. These new habits are likely to continue. A quality website will become even more critical to your success in a post-pandemic world.

Source: BDC MAY 2020 Economic Letter