What’s dragging down the Canadian economy as the world reopens?

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Road to recovery © Gustavo Frazao /123RF Stock PhotosAlong with the rest of the globe, Canada isn’t likely to see the V-shaped recovery that institutional investors were hoping for as it stares down the recessionary road ahead.

“Canadian activity was also on the softening path even at the end of last year,” says Irene Lauro, an economist at Schroders. “And this is because domestic demand was getting weaker and also, on the external side, exports in particular were softening even before the pandemic.”

The latest employment numbers for May are certainly an improvement over the dismal losses seen through March and April, she adds. “It seems economic activity bottomed out in April.”

But despite the one-two punch of substantial monetary and fiscal stimulus, consumer confidence is going to have a sluggish recovery. While industrial production may crank higher, it remains to be seen whether buyers will be there for the goods produced. “We think consumer confidence will take some time to recover, given the shock to income and unemployment,” says Lauro. “We’ve seen that, after previous pandemics, consumers tend to be more cautious, they really tend to be reluctant to go out and spend.”

This reluctance will likely bleed into businesses, causing them to be more cautious in their investment spending, she adds. While, overall, the economic data emerging from the end of this year’s third quarter will look like a recovery, she advises investors to prepare for more modest growth in the medium term. Indeed, pre-coronavirus levels of growth aren’t likely to manifest worldwide before the end of 2021.

Canadian consumers are also highly indebted, which will likely exacerbate their decreased spending confidence going forward. And while housing activity jumped higher in May after transactions ground down through March and April, there are longer-term reasons why it won’t easily return to more normalized levels, says Lauro.

“For the housing market, the big concern is all of these travel restrictions. Immigration to Canada has already started to fall and international student arrivals are much slower than the previous years. So the demand for housing will likely be depressed for some time, pushing down prices. And that could be another drag on the wealth for Canadian households.”

Canada’s recovery will also lag due to the shock to the energy sector, she notes. Indeed, the International Energy Agency estimated that oil demand will remain below the 2019 levels into 2021. As such, Canada’s oil patch will suffer from elevated levels of unemployment for longer. “Canada is a great exporter of oil and global demand will take some time to recover and this is because a lot of demand for oil comes from the transportation industry and air travel and all the other transports will take a long time to normalize.”

This article originally appeared on CIR’s companion site, Benefitscanada.com. Read the full story here.

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