An economic reckoning for the capital region, both now and later

James Bagnall – Ottawa Citizen

OTTAWA - MARCH 23, 2020 - In the midst of COVID-19 fears, a solitary man walks down Sparks Street Monday around lunch hour - a time when the downtown area would normally be bustling with people.  Julie Oliver/Postmedia
Even if social distancing quells COVID-19 outbreaks, it may be a while before Sparks Street and other public spaces fill again with crowds. JULIE OLIVER / Postmedia

On the face of it, the capital region looks better placed to survive the economic storm unleashed by the COVID-19 virus than the country’s other major cities. But the advantage is slim and likely won’t last.

More than 22 per cent of the workforce here is in public administration, the vast majority with the federal government, a startlingly high percentage. Only Victoria (13.4 per cent) and Quebec City (11 per cent) are in the same league. While social distancing has eviscerated revenues in many other sectors, government workers, with just a few exceptions, continue to draw salaries, providing a base of at least some stability for the local economy.

At the same time, Ottawa and Gatineau rely comparatively less than other cities on industries that have been particularly hard hit: retailing, transportation, hotels and food services.

And, outside the workforce, the capital region is home to a sizable pool of government retirees who rely on rock-solid pensions, guaranteed by the Canadian taxpayer. They did not have to worry about this month’s collapse in stock market values, as many private-sector retirees did.

Even so, these are small comforts in the face of the wider havoc being wreaked by this virus. Regardless of its relative strength, the capital region’s economy will not only suffer profoundly in the weeks to come, there will be a further reckoning down the road as the federal government starts paring its spending to more usual levels.

Certainly that’s how things played out during the last two economic contractions, when the government, as now, increased direct hiring during the crises while private sector firms were in free fall. Later, when the world returned to normal, the federal government reversed the cycle

For instance, the early 1990s recession blew a hole in the federal government’s budget so large Liberal Finance Minister Paul Martin was compelled in 1995 to slash spending by departments and trim 45,000 workers from the national payroll over the following three years. Nearly 40 per cent of those cuts affected government employees in the capital region.

The 2008-09 recession, triggered by the global financial crisis, produced a similar aftermath.  After running up what seemed at the time to be massive spending deficits — they peaked in 2010 at nearly 3.5 per cent of gross domestic product, or $70 billion in today’s dollars, the Stephen Harper administration began a multi-year squeeze of the public service.

Of the two economic traumas, the financial crisis offers the best insight into what we can expect now, not least because it was both unexpected and swift, just like the knock-on effects of the COVID-19 virus. In the five months it took to reach the employment trough in 2009, the capital region lost nearly 35,000 jobs — some five per cent of the workforce.

During that period the number of government jobs locally actually increased by 4,500 (3.1 per cent) as Harper boosted spending on capital projects and government hiring.

Meanwhile a shrinking economy slammed the same unfortunate sectors that are suffering today.  Retailers shed 17,400 jobs (down 19.1 per cent from peak to trough), employment in publishing, arts and entertainment collapsed by 8,100 (down 22.7 per cent) and hotels and restaurants cut 6,500 jobs (down 16.3 per cent).

At the time, these seemed shockingly deep and fast declines.

The city’s service employees would gladly exchange today’s situation for that one.  Employment insurance claims earlier this month rocketed up to 930,000 nationally during the week of March 16-22 — 885,000 higher than normal.

If workers in the capital region made claims proportionate to our population, that would mean close to 32,000 people locally.  Given the large numbers of government workers who don’t require E.I., the number of claims submitted in Ottawa and Gatineau was probably closer to 25,000.

Even this would have produced a nearly instantaneously jump in the local unemployment rate to more than seven per cent from 4.3 per cent in February. And we’re just at the beginning of the economic contraction with scant notion of when it will end. Yves Giroux, the Parliamentary Budget Officer, last week projected the national jobless rate would reach 15 per cent in the third quarter.  A somewhat less horrifying 12 per cent rate for the capital region would translate to about 100,000 people without jobs here, a net rise of 65,000.

Little wonder that Prime Minister Justin Trudeau has been prepared to use a fire hose of cash for affected workers and loans for shocked businesses, producing a massive increase in sovereign debt.

Even before Friday’s announcement that the government would offer small businesses wage subsidies representing 75 per cent of usual pay, Giroux had forecast a federal government spending deficit of nearly $113 billion for the fiscal year starting April 1. That’s slightly more than five per cent of the country’s annual production as measured by GDP, the highest since 1994.

If we include the cost of Friday’s programs — which Finance Minister Bill Morneau estimated were equivalent to $65 billion in additional financial support for businesses and workers, excluding $30 billion in tax deferrals and the wage subsidy — next year’s government deficit could surge past $200 billion.  That would be some 10 per cent of GDP, easily a postwar record.

Surprisingly, we can afford it, as long it proves a short-term thing. The net federal debt in fiscal 2019 was $772 billion — a relatively modest 35 per cent of GDP, the lowest within the major G7 economies.

Add in the combined net debt of the provinces — another $455 billion, a good chunk of that Ontario’s — and you have total government debt at roughly 55 per cent of GDP, prior to the COVID-19 response. This, according to the public accounts.

Let’s say the cost of waging this virus war hits $250 billion over the next three to five months. Total net government debt would be about two-thirds of GDP, still relatively manageable because interest rates for the moment are so low.

The scary part of course, is we have no idea how long governments will be forced to play the role of employer and banker of last resort for huge swaths of the economy.

Most private-sector economists are forecasting a very large contraction April through June — a drop of some $150 billion in lost economic activity from first quarter levels — with a rebound starting by the fourth quarter at the latest. Giroux projects real GDP for the year as a whole will shrink five per cent. That would be the country’s worst economic performance since 1962.

Even if social distancing manages soon to quell the number of positive COVID-19 tests, evidence from China suggests it may take some time to get back to normal, absent a vaccine or cure. “People now can move more freely,” The Economist’s China correspondent reported this past week about that country’s exit from two months of lockdown, “but many still avoid large crowds. Shops and restaurants are quiet.”

After the great recession of 2009, it took the capital region one year to recoup its lost jobs after hitting bottom. The country as a whole required 17 months. It may take longer this time around on both counts.  The cost, most certainly, will be much bigger. But the cost of doing too little to shore up the finances of Canadians and their businesses would have dwarfed even that.

OTTAWA - MARCH 23, 2020 - In the midst of COVID-19 fears, a solitary man walks down Sparks Street Monday around lunch hour - a time when the downtown area would normally be bustling with people.  Julie Oliver/Postmedia

After the great recession of 2009, it took the capital region one year to recoup its lost jobs after hitting bottom. The country as a whole required 17 months. It may take longer this time around on both counts.  The cost, most certainly, will be much bigger. But the cost of doing too little to shore up the finances of Canadians and their businesses would have dwarfed even that.

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