State of Freight TODAY

Canada: The Economy Reopens and a Long Cool Road Back Beckons

Canada: The Economy Reopens and a Long Cool Road Back BeckonsThe Canadian economy is reopening after suffering a sharp decline because of the COVID-19 virus. Economic damage from the virus was steep. The 8.2% annualized decline in the first quarter equaled the darkest days of the Great Recession. The decline only reflected March, and the lockdown of the economy did not come into full effect until the middle of the month. Preliminary data from Statistics Canada indicate April’s decline will far surpass March, and May will likely show the shock further propagated through the economy in May.

Reflecting the economic shock are the country’s jobless numbers. Signs emerged that the labor market began to heal in May, as easing restrictions allowed Canadians to return to work. The complexity of the shock is reflected in May’s employment report. Total employment rose by 290,000 in May from April, while the surge of job seekers drove the unemployment higher to 13.7%, as the labor force expanded by 491,000. The month’s job gains accounted for about 11% of the losses since Febru-ary. The report was positive as the consensus expected further layoffs. The extent of the damage to the labor force remains massive. Employment remains 13.5% below its prior-year level and Statistics Canada estimates that more than one-third of the potential labor force is underutilized. The easing of restrictions is occurring at differ-ent speeds across the provinces. Quebec drove May’s result. As Ontario, with the largest labor force opens up, the numbers might repeat in June. The next few month’s employment gains will tell us a lot about the strength and sus-tainability of the recovery. Unemployment should top out near 14% and start drop-ping. Gains across provinces should out-number the gains in the labor force, andunemployment is projected to drop to near 8% as businesses fully reopen. The ques-tion then is sustainability and will the virus return? The timing of a vaccine will come into play. Without a sustained increase in final demand, the recovery is in danger of stalling out, if businesses stop hiring or if consumer spending slows. This will be a problem for the U.S. also. Without more stimulus, if the virus resurfaces, there is a high probability of a double-digit recession. Until a vaccine is introduced, downside risks are high.The COVID-19 shutdowns hit Canadian manufacturing hard, but the sector is trying to rebound. The Purchasing Manager’s index increased from 22.8 in April to 39.1 in May. The index stood at 55.9 in May 2019. Despite the May improvement, the index still stands well below the expansionary 50 mark. Employment improved to 41.9 from 22.9 in April. Inventories improved to 46.8 in May, up from April’s 34.5. Prices were the only component that rose above the 50 mark, hitting 54.9 in May. Canadian manu-facturers have a long hill to climb. The U.S. manufacturing sector is weak, and the global economy is struggling to emerge from recession. In May, manufacturers added 79,100 and construction 73,700. Like the U.S., Canadian factories are starting to reopen. The question now is, how strong will final demand be?Falling exports will have hurt GDP growth in the second quarter as the severe restric-tions on cross border transportation with the U.S. and falling energy prices have taken a toll. The retreat in motor vehicle and aerospace product demand has also been substantial. The outlook calls for a gradual recovery for the manufacturing sector, but the road back is likely to take a long time. Shrinking imports will offset some of the losses of exports to GDP growth but won’t help the ailing manufacturing sector.How Canada’s economy behaves in the rest of the year will depend on consumer spending. In the first quarter, spending on nondurables soared as households stocked food and other essential supplies. Spending on most other categories crumbled. Social distancing and stay-at-home orders curtailed spending on services, and a pull-back in discretionary purchases like new cars dealt a blow to durable goods purchas-es. The return of GDP growth in the third quarter and beyond will be driven by pent-up demand. Consumers will pick up spending on services. How quickly they pick up spending on clothing and durable goods will determine the strength of the recovery. A recovery will start in the third quarter, and the numbers will be good by any calcula-tion. However, it won’t outrun the damage caused by the shutdown. Growth is likely to hit 2021 at a slow level, and unemployment will have a hard time getting below 8%. That is unless a vaccine is found. Growth is likely to be slow until something positive happens on a global level that re-energizes the global economy. That would be driven by discovery and mass distribution of a vaccine. Until that time, the virus will still be there, and a second wave of infections a real probability. Slow growth is not wanted, but it may be the best that we can accomplish.Reflecting the economic shock are the country’s jobless numbers. Signs emerged that the labor market began to heal in May, as easing restrictions allowed Canadians to return to work. The complexity of the shock is reflected in May’s employment report. Total employment rose by 290,000 in May from April, while the surge of job seekers drove the unemployment higher to 13.7%, as the labor force expanded by 491,000. The month’s job gains accounted for about 11% of the losses since Febru-ary. The report was positive as the consensus expected further layoffs. The extent of the damage to the labor force remains massive. Employment remains 13.5% below its prior-year level and Statistics Canada estimates that more than one-third of the potential labor force is underutilized. The easing of restrictions is occurring at differ-ent speeds across the provinces. Quebec drove May’s result. As Ontario, with the largest labor force opens up, the numbers might repeat in June. The next few month’s employment gains will tell us a lot about the strength and sus-tainability of the recovery. Unemployment should top out near 14% and start drop-ping. Gains across provinces should out-number the gains in the labor force, andunemployment is projected to drop to near 8% as businesses fully reopen. The ques-tion then is sustainability and will the virus return? The timing of a vaccine will come into play. Without a sustained increase in final demand, the recovery is in danger of stalling out, if businesses stop hiring or if consumer spending slows. This will be a problem for the U.S. also. Without more stimulus, if the virus resurfaces, there is a high probability of a double-digit recession. Until a vaccine is introduced, downside risks are high.The COVID-19 shutdowns hit Canadian manufacturing hard, but the sector is trying to rebound. The Purchasing Manager’s index increased from 22.8 in April to 39.1 in May. The index stood at 55.9 in May 2019. Despite the May improvement, the index still stands well below the expansionary 50 mark. Employment improved to 41.9 from 22.9 in April. Inventories improved to 46.8 in May, up from April’s 34.5. Prices were the only component that rose above the 50 mark, hitting 54.9 in May. Canadian manu-facturers have a long hill to climb. The U.S. manufacturing sector is weak, and the global economy is struggling to emerge from recession. In May, manufacturers State of Freight TODAYwww.ftrintel.com/softodaySteve Grahamadded 79,100 and construction 73,700. Like the U.S., Canadian factories are starting to reopen. The question now is, how strong will final demand be?Falling exports will have hurt GDP growth in the second quarter as the severe restric-tions on cross border transportation with the U.S. and falling energy prices have taken a toll. The retreat in motor vehicle and aerospace product demand has also been substantial. The outlook calls for a gradual recovery for the manufacturing sector, but the road back is likely to take a long time. Shrinking imports will offset some of the losses of exports to GDP growth but won’t help the ailing manufacturing sector.How Canada’s economy behaves in the rest of the year will depend on consumer spending. In the first quarter, spending on nondurables soared as households stocked food and other essential supplies. Spending on most other categories crumbled. Social distancing and stay-at-home orders curtailed spending on services, and a pull-back in discretionary purchases like new cars dealt a blow to durable goods purchas-es. The return of GDP growth in the third quarter and beyond will be driven by pent-up demand. Consumers will pick up spending on services. How quickly they pick up spending on clothing and durable goods will determine the strength of the recovery. A recovery will start in the third quarter, and the numbers will be good by any calcula-tion. However, it won’t outrun the damage caused by the shutdown. Growth is likely to hit 2021 at a slow level, and unemployment will have a hard time getting below 8%. That is unless a vaccine is found. Growth is likely to be slow until something positive happens on a global level that re-energizes the global economy. That would be driven by discovery and mass distribution of a vaccine. Until that time, the virus will still be there, and a second wave of infections a real probability. Slow growth is not wanted, but it may be the best that we can accomplish.

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