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HomeMy WebLinkAboutDSD-20-064 - Financial Economic Supports for Residents & Businesses Preliminary briefing note on economic impact of COVID-19 March 22, 2020. Prepared by Janette MacDonald, Organizational Development Associate, ext. 7249. Economists are currently predicting a sharp slide into recession, but the shape of the recovery is unknown --it will depend on the duration of distancing measures and the influence of appropriately-timed government support and stimulus. Canada is poised to respond from a position of financial and economic strength, illustrated in the unprecedented $82 billion federal package of supports. With new information emerging daily, predictions are changing regularly.Recently RBC and CIBC predicted a Canadian economic contraction at an annualized rate of 2.5 and 3.0 per cent respectively for the 2nd quarter of 2020 -- predictions that are likely understated as they preceded emergency declarations and significant closures. In contrast, the United States is predicted to contract by 14 per cent, while the Eurozone is forecast to contract at 22 per cent and the United Kingdom may be as high as 30 per cent. This descent into global recession is exacerbated by dual forces: a negative supply shock as output of goods and services falls, while simultaneously consumers are reducing their spending. In the short-term, there are limited options for any level of government to affect economic activity,so the focus has shifted to preservation tactics. Public health priorities limit businesses from restoring their operations and consumers have reduced capacity to spend due to loss of earnings and/or limited access to goods and services. The return of consumer confidence will play an important role in restoring economic activity, but at this early stage should be expected to be restrained; as businesses reopened in China, consumers remained at home to avoid infection. Therefore, the efforts of other levels of government are focused primarily on supports to insulate against layoffs (e.g., wage subsidies) and incomes supports (e.g., Emergency Support Benefit) to help individuals facing loss of earnings. The mandate of municipal Economic Development is typically to support and strengthen the competitiveness of local industries,but focus now turns to supporting the continuanceof businesses in at-risk industries. Impact by industry The impact of the economic shock caused by COVID-19 varies by industry, with the following types of businesses hardest hit: Service businessesand goods-producers who cannot store or recover lost output (e.g., cinemas, restaurants, · bakeries, salons, transportation) ·Businesses already operating on slim margins or without access to corporate financial supports (e.g., independents restaurants and retailers) ·Businesses that are dependent on concentrated volume of human activity/foot traffic (e.g., downtown establishments, tourism and recreation) ·Businesses in industries already under stress (e.g., retail) ·Businesses offering non-essential goods and services (e.g., florists, gift shops, massage therapists, gyms, salons) (note: some businesses will fall into more than one category) In general, the industries that will be disproportionately affected are retail, food services, transportation, entertainment, recreation and hospitality. There are some promising signs that retail employees may be able to find new employment through storesrequired to maintain operations(e.g., Wal-mart is hiring 10,000 new employees in Canada). But, there is limited growth potential in the retail sales of essential goods. The following table outlines the number of local employees and establishments by industry and a preliminary risk assessment. ’ To understand how the impact may look, we can review February economic performance in China, which posted the following results: Retail sales tumbled 20.5 per cent · Fixed-asset investment, which includes construction of buildings, roads and railways, slipped 24.5 per cent. · Industrial production fell 13.5 per cent · Impact on manufacturing The local outlook for manufacturing is mixed; shutdowns will reduce output and correspondingly put a dent in GDP, but there are other mitigating factors as play as well. The employment outlook is less severe than the hospitality and retail industries as modern manufacturing requires much more skilled workers --talent that competitive manufacturers will be reluctant to let go. Smaller manufacturers and those with thin margins may not have that luxury though and may be forced to lay off workers that they will need to resume production. Manufacturers that are dependent on global supply chains face an uncertain outlook that will be affected by the recovery of other nations, especially China. When global supply chains are fully operational, some manufacturers may benefit from falling oil prices should they remain low. Those manufacturers that have the flexiblity to pivot operations in response to the Province's call for the production of essential supplies face a more optimistic outlook. Kitchener manufacturers have a proud history of adapting to global market changes including the diversification of production and markets served. Given the variety of factors at play in manufacturing, it is premature to project the impact on local manufacturers with current information. It is important to note that the manufacturing shutdowns are not due to lack of competitiveness or structural economic shifts; the impact of COVID-19 is what economists call an ‘exogenous’ shock, meaning that something outside the industry caused a disruption, but the industry as a whole has been stable in recent years. Conclusion In general those businesses that were already working hard to stay afloat may face insurmountable challenges to remain viable. This will be especially pronounced in industries dependent on discretionary spending and those already facing competitive challenges from disruptions to business models, such as the move to online shopping. Thus, incentives from other levels of government are focused on mitigating the financial hardship of businesses to sustain them through the state of emergency, with broader stimulus a more likely long-term strategy. Kitchener businesses will benefit from similar financial incentives and supports to increase their resilience to these challenging times.