How this recession will and will not differ from previous ones.
Here’s the short version:
TL;DR The recovery from this recession will be unlike anything we have seen in our lifetimes, full of known unknowns and unknown unknowns. This requires us to keep an open mind and recognize the post-recovery world may look significantly different than the pre-crisis one.
Two things before we start:
- I will be constantly updating this piece with new information, ideas and data.
- Nobody really knows what the next five years will look like. This is an unprecedented crisis and there is a staggering level of overconfidence in our (individual and collective) ability to predict the future.
I thought it would be helpful to catalogue the ways that the current recession (and recovery) differ from past recessions, most notably these four occurring in the early 1980s, early 1990s, the Great Financial Crisis of 2008–09, as well as the statutory recession of 2015. (The recession of 1973–74 was a bit of a different beast, which is worth discussing in another post).
To begin, here are the ways the current recession (and recovery) are similar to the last four.
Ways the current recession and recovery will almost certainly be similar to the last four
#1: Deterioration of federal and provincial income statements and increasing deficits. (This should go without saying).
#2: A reduction in hiring, which disproportionately impacts new graduates.
We tend to think of employment declines in recessions being due to people losing their jobs. That is a large part of the story, but we tend to all see a sharp drop in the number of people hired. This disproportionately impacts those graduating from higher education into a job market with few jobs. This tends to have a scarring impact on the career advancement and earnings of those graduates. There is little reason to believe that this recession will be any different.
#3: Businesses and industries that were already struggling experience accelerated rates of closures
Here’s an example: Ontario manufacturers shed 223,000 jobs between 2004–08, largely due to a combination of a rising Canadian dollar and accelerated competition from China. The rate of job loss doubled during the financial crisis as the drop in demand enhanced the pressures faced by those firms:
It will almost certainly be a different set of industries (and businesses) this time out, but we should expect the same forces at play, with already troubled businesses going under. Brick and mortar retail is the obvious example; as the long-stand trend of bankruptcies in the sector appears to be escalating. As Warren Buffett says, only when the tide goes out do you discover who’s been swimming naked.
Ways the current recession and recovery will, in my opinion, likely be similar to the last four
I would have put these in the “almost certainly” category, but I won’t since a number of very smart people disagree with them. We should not be overconfident during this crisis, so I will downgrade these to “likely”.
#1: The Canadian economy experienced a non-trivial drop in aggregate demand
See my earlier piece.
#2: The aftermath of this crisis is going to leave non-trivial levels of resources idle in the economy
Labour is likely one, particularly that of new graduates, as well as those working in the hospitality industry. Retail real estate is likely another. I put this under likely, not almost certainly, because there is a constituency that believes that the economy will return to near-normal levels after lockdowns end, and there will be few permanent effects.
Ways the current recession and recovery will almost certainly be unlike the last four
Pundits and economists (like those I mention in my earlier piece) are not wrong that this recession differs substantially from previous ones. Here are a few key differences.
#1: The economy is experiencing a large supply shock
While there’s disagreement about the existence of a demand shock, I don’t believe anyone is arguing that we’re undergoing a supply shock, in a way we didn’t in the past four recessions.
#2: The timing of this crisis is different (and makes fighting it trickier)
If we massively oversimplify the last four recessions, the cause of each was the following:
- Early 1980s: Federal Reserve’s fight against inflation
- Early 1990s: Federal Reserve and Bank of Canada’s fight against inflation
- 2008–09: Financial meltdown in September 2008 following the 2007–08 subprime mortgage crisis
- 2015: Oil price crash impacting Canada’s terms-of-trade
In the first two cases, there was some ability to forecast the duration of the crisis since they were, in part, policy-driven. In the second two, the crises happened quite quickly and policies could be implemented as soon as possible to help the economy recover.
This crisis is different, as we have what people are calling a “restart” phase, of indeterminate length, where we can only partially re-open the economy. As John McNally and I argue in the Globe and Mail, “restart” is entirely the wrong analogy. This intermediate period is more like climbing a mountain with peaks and valleys, and we will likely have several periods of tightening restrictions. Unlike in past recessions, this will limit our ability to fully re-engage idle resources, in part because full employment is not a desirable goal when an office full of workers can worsen a pandemic.
#3: Past recessions have primarily affected goods-producing industries and blue-collar men. This recession, so far, is disproportionately impacting service industries.
A couple of slides from a PowerPoint presentation I’ve been giving to policymakers. I should probably do a public webinar on this at some point.
These ratios will almost certainly change when we enter the climb portion of this recovery, as sectors will recover at a different rate. It is hard to know exactly what, say, the ratio of job loss in goods vs. service sectors will be a year from now. However, I think we’re on relatively safe ground thinking that it will look different from previous recessions.
#4: The pandemic is causing substantial behavioural changes. Some of these changes may persist after the pandemic is over, forever altering our economy.
During this crisis, we’ve seen a dramatic rise in a number of activities, including (but not limited to):
- Working from home
- Online shopping
- Online banking
- Working out at home
- Downloading video games (rather than buying physical media)
And a substantial reduction (and in many cases elimination) of the following activities:
- Using public transit
- Eating at restaurants
- Air travel
- Attending movies, sporting events and concerts.
All of these will revert somewhat; the end of the office predictions are a little silly. But to what level will they rebound? 80%? 90%? 100%? 110%, as their absences makes us realize how much we value them? An only 80% recovery of brick and mortar retail and public transit would cause massive changes to how we live, how our economy functions, and the financial sustainability of our cities, which rely heavily on the revenues generated by both.
That’s my list; I’ll be adding to it over time. I’d love to hear yours!