Here we are once again… sort of.
Last week we learned of the provincial government’s plans for tighter restrictions, mandated business closures, and banned social gatherings across Alberta as 2020 draws to a close. For many, these measures come as no great surprise given the sustained rise in COVID-19 case numbers and the acute pressures now being placed on hospital services, with this ultimately tilting the balance of policymaking away from the imperatives of keeping the economy open. Of course, that the provincial government proceeded down this path only as a last resort – and even then with some reluctance – points to the significant economic effects it is likely to have.
In assessing these, to a certain extent, we can look back to the experience of the first wave of COVID-19 cases earlier this year and the policy responses it provoked. During that period, economic output across the province contracted sharply in line with tightening public health measures over the course of March and April, with the Alberta Activity Index (AAX) contracting by -1.4% q-o-q in 2020-Q1 and -10.2% q-o-q in 2020-Q2. Monthly retail sales collapsed (by 28% to end-April), as did manufacturing sales (-26%) and sales at bars and restaurants (-58%). The consequences of these historical drops in output were seen in the labour market also, with over 360,000 jobs lost in the span of two months and the unemployment rate rising to 15½% (Figure 1).
The federal and provincial government rolled out an enormous package of supports to both individuals (CERB) and businesses (CEBA, CEWS, SME Relaunch Grant), with these proving pivotal in ensuring that various sections of Canadian society – from job creator to part-time employee – received some form of rapid relief from near term financial strains. In the subsequent months, we have seen these supports and recovering employment more generally underpin a consumer-led rebound in economic growth. Indeed, the AAX (and the indicators underpinning it) rebounded to rapid 6.2% q-o-q growth in 2020-Q3, underpinning expectations for robust economic recovery in the near term as virus-related risks initially appeared contained.
Notwithstanding the positivity of the early recovery phase, for those of us watching the data closely and – more importantly – directly engaging with businesses on the ground across the province, this recovery has shown signs of softness for a while now. Dig into the numbers just a bit and you find that, while the economy has indeed recovered over two-thirds of the jobs lost due to the pandemic, these gains have overwhelmingly been in part-time employment which is now higher than pre-pandemic levels. Full-time employment positions, meanwhile, remain 6.5% lower, equating to almost 125,000 jobs that have yet to be regained. In the absence of a more robust and jobs-rich strengthening of the labour market and household incomes, headwinds to further gains in consumption are likely to emerge.
On the business side, meanwhile, we have yet to see any signs that confidence is returning at a rate sufficient to spur a large pick-up in investment, especially in the oil and gas sector. Uncertainty around businesses’ future sales expectations is heightened, with this having knock-on impacts on future hiring intentions; while capital investment projects have been postponed or shelved altogether (Figure 2). All of this, meanwhile, has been compounded by a more challenging private sector financing environment. Ballad’s own engagement with Albertan businesses initially pointed to cautious optimism regarding future sales, albeit coupled with an acknowledgement that policy uncertainties and pandemic-related risks are extremely elevated. It is a reasonable assumption that many of these businesses are now in the process of revising their sales forecasts downwards following this latest announcement.
The adverse economic effects of the latest tightening in restrictions will be somewhat offset by countervailing factors. Firstly, the provincial government has augmented its earlier SME Relaunch Grant; affected businesses are now able to claim a non-refundable grant up to a maximum of CAD 20,000 based on a sales decline of 30% (versus 40% previously). The provincial government’s own estimates suggest that some 30,000 businesses will be affected by these latest measures, with this support providing direct cash flow at a time when they will need it most.
Secondly, Alberta’s economy, labour market and business community has been through this before. While these restrictions are unambiguously negative for business, many have been able to adjust their business models to respond rapidly to changing occupancy allowances and alternative delivery formats. Furthermore, public policy has learned from its missteps the first time round: entry requirements to some funding programs have been loosened; federal programs such as the Canada Emergency Rent Subsidy (CERS) have undergone important reforms and are now more effective, while others such as the Canada Emergency Wage Subsidy have been extended and afford business owners greater certainty; and organisations such as Community Futures are also flexible in stepping in and further assisting those that need it.
Nonetheless, taking all of this together, it appears that the economy is set to slow once again as we approach the holidays and enter a new year, while expectations for a rebound thereafter are highly uncertain. This latest round of restrictions ensures that the recent Mid-year Fiscal Update and Economic Statement is unlikely to age well: nominal deficits and debt levels will likely climb higher from current forecasts; while real GDP growth is set to be revised lower, especially in 2021 due to carryover effects. In line with this, Ballad is currently in the process of updating its own internal provincial forecast which previously anticipated a rebound of around 4% in 2021 – this latest round of restrictions presents material downside risks to that forecast.
Ultimately, the decision to tighten restrictions has been forced by non-economic factors, with the corresponding announcement of fiscal transfers providing some relief, albeit modest. These supports can only be considered a short-term band-aid in the context of a health crisis that may dissipate once vaccines are more widely distributed in 2021. Going forward, what is increasingly needed is a longer-term discussion on how to address what appear to be the pandemic’s many legacies, including: high unemployment, weak non-residential investment levels, elevated mortgage deferrals and household debt, rising public sector imbalances, and persistent structural barriers to growth in our economy. It is addressing these challenges that will determine Alberta’s long-term prosperity well after the dust from this latest round of restrictions settles.
The Ballad Auger is written by Research Analyst, Alan Gilligan.