In response to the COVID-19 situation, Canada
is about to undergo a pretty major economic shock comprised of both an
aggregate supply shock - given the disruption to supply and production chains -
and an aggregate demand shock - as consumer and business spending dries up.
This is unprecedented and the ultimate effects on price and output will depend on the proportionate size of the leftward shifts. And of course, when things in the global world economic order get tough, you
can always count on "team players" like Russia or Saudi Arabia to
make things worse as they have with their oil production squabble. This will
provide the final push to conditions that were already driving a potential
Canadian slowdown given the length of the business cycle, and the impact of
trade restrictions and disruption with both the US and China. Ironically,
those elements in Canada who were trying to shut down the Canadian economy with
transportation and production blockades only a few short weeks ago, will get
their wish in ways they could not possibly imagine.
This shock is mainly to expectations and
confidence on the part of consumers, investors and business. Anything
that requires non-essential consumer spending - restaurant meals, tourism,
travel, and leisure activities - will be hit the hardest. Essentials in
sectors such as food and supplies will do better. Many personal services
will also be hit hard in the immediate term. Online services and shopping
especially with delivery service will get a boost. At the same time, this is an
"animal spirits" driven crisis and once it appears the COVID-19
situation is under control, there will be a fairly rapid resumption of activity
and pretty quick bounce-back from any recession in Canada. The
longer-term is more interesting. Just as 9-11 changed global trade,
travel and interactions in many ways, this too may result in changes in travel
mobility especially. The openness of borders that marked the second age
of globalization from the 1990s to the present may fade.
From a health economics perspective, Canada
is a highly developed economy with an excellent health care system.
Moreover, in the aftermath of SARS in the early 21st century, there was
substantial investment in public health infrastructure so in general it is very
well prepared. However, like other countries, the danger from COVID-19 is
that despite the fact that most people have mild symptoms, that small
proportion that has more severe illness is large enough to overwhelm the
health-care system - particularly the supply of acute care beds and
respirators. Here Canada is less prepared than most. Despite being one of
the largest health care spenders in the OECD, it has one of the lowest per capita
amounts of hospital beds and physicians in the OECD. A case in point, Italy has much
higher bed and physician numbers per capita than Canada and it is still being
overwhelmed. Canada's hospital system in particular has been at capacity for years and
there really is no slack. A major question that must be answered once
COVID-19 is under control is where did all the health spending money go?
How can one be one of the biggest spenders on health in the developed world and yet be at
the bottom for indicators such as hospital beds and physician numbers and often
only mid-ranked on many health indicators? There should be a reckoning here.
In response to COVID-19, there
has been a pretty unprecedented response on both the fiscal and monetary policy
side from our federal government and the Bank of Canada. Ottawa is about
to open the spending taps with stimulus and supports, which will undoubtedly
include money for the provinces to spend on health. There will be large
deficits and this is a time where deficits are called for though it should also
lead to the question as to why deficits have been so large to date in the
absence of a downturn or crisis. Interest rates have dropped dramatically
and by mid-April will probably drop even more. In many respects, this is
the right thing to do given the immediate crisis but there are limits to what
all of this can accomplish.
In the end, this downturn is an "animal
spirits" driven crisis that is being driven by expectations and
uncertainty. All the king's spending and all the king's horses will not
have an effect if people are afraid to venture out and spend. Put another way, you can lead a
horse to water but you cannot make it drink if it is afraid to leave the barn.
The biggest stimulus to the economy is confidence that governments and
health authorities know what they are doing and are getting the situation under
control - a drop in infection rates would be the clearest indicator of
this.
Announcing measures like enhanced screening
at airports and points of entry followed by news stories of people getting off
planes on international flights in Vancouver or Toronto with nary a query is
not a recipe for boosting confidence. Where are the screening staff at
Canadian border entry points making sure everyone is asked questions about
where they have been and taking temperatures? What is being done to boost the supply of beds and respirators? Getting the situation under
control ultimately requires more than spending announcements and moral
suasion. It also requires evidence of effective action. These are not regular times. Words are not enough.
