Coronavirus (COVID-19) and the economy: North America

Date : 27 March 2020

Lii Bernovski-Smith

Senior Business Analyst

We look at the present impact of the pandemic on regional economic performance.

  • As the US has become the new epicenter of the infection, an economic downturn becomes more likely
  • An increase in the numbers of unemployed has been recorded in Canada and the US
  • Food production and retail are set to weather the storm, subject to uninterrupted supply and adequate social security benefits
  • Keeping the US border open to goods transport key to maintaining grocery supplies in Canada

Movements of people and goods

Before the Covid-19 outbreak, the vast expanse of the US and Canadian territories, with no hard-internal borders, allowed for a smooth movement of essential goods between individual states and regions, and the two countries exchanged freely as part of the NAFTA area.

The situation has changed. At the international level, Canada and the USA were among the first countries to restrict access to non-nationals and non-residents as of mid-March, before agreeing to close their common border, except for good transportation and the movement of workers.

In the countries, enforced lockdowns in California, New York, Illinois, Québec and Ontario have imposed de facto restrictions to mobility. The stock of food provision in stores in Canada is holding up, although it is reliant on the unimpeded transportation across the border. As the pandemic moves west, from Europe to the US, there are going to implications for the grocery supply chain.

Economic impact of Covid-19

As global authorities’ opinions are starting to come in, such as the IMF’s Kristalina Georgieva’s remarks at the G20 Leaders’ Summit on the 26 March, it is clear, Covid-19 will have a negative effect on the global economy. However, the downturn may not be reflected in food manufacturing, retail and wholesale industries. It is logical to assume that food and beverage goods, unlike items of more discretionary nature, have a natural limit of satiation and are relatively inelastic in demand.

However, the understandable fear of running out of essential products, has fuelled an increase in weekly sales. The rise in grocery retail across both physical and online channels may not fully even out to the pre-virus levels as at least some of the out-of-home consumption is transferred into grocery spending.

Wholesale is more exposed to risk than retail, depending on the profile of business customers. Wholesale operators, mainly serving the leisure industry, are susceptible to declines in revenue, unless lost sales can be mitigated by focusing on grocery retailers and opening the doors to the general public. Provided there are no interruptions to supply and the safety net of social security is adequate, the grocery industry is set to withstand this storm.

Other industries may not be quite so fortunate. In both Canada and the USA, increases in the number of unemployed have hit new highs. The Canadian Government received an estimated 929,000 employment insurance claims between March 16 and 22, while in the USA nearly 3.3 million people filed a claim for jobless aid in the week ending March 21. In both countries, the escalation of social-isolation requirements forced many businesses to curtail their operations.

The effects on stock markets globally has affected those in Canada and the USA. The S&P/TSX (Toronto’s main index) and the Dow Jones Industrial Average lost more than 25% between 2 and 23 March. Both countries are at risk of suffering a fall in production, while their biggest companies are also exposed to the international slowdown affecting Europe and Asia.

National economic policy responses

Both the US and Canada launched measures aimed at tackling the negative effect of Covid-19 on people’s disposable incomes and companies’ access to finance.

In the USA, the Federal Government passed a bill to provide an economic stimulus of US$2 tr. One of the most emblematic measures consists of (means-tested) direct payments of US$1,200 per adult and US$500 for each child under the age of 17. Other measures include the suspension of student loan repayments, a moratorium on tenant eviction, a temporary boost in unemployment benefits of US$600 per week, as well as financial support and guarantees to various sectors including hospitals, airports and airlines.

In Canada, the Federal Government passed a stimulus package worth CAD107 bn (US$76 bn). Half this amount consists of direct support to workers and businesses, the other half of tax deferrals. In more detail, the direct support will involve augmenting unemployment insurance benefits, providing grants to families of low and modest means, and assisting individuals whose livelihoods have been harmed by the outbreak. The package also helps businesses, including a temporary wage subsidy and improved access to credit.

On top of these fiscal responses, both the Federal Reserve and the Bank of Canada have announced measures to facilitate financial recovery. The Fed has effectively lowered its main interest rates to 0% or 0.25% and pledged to purchase nearly a trillion dollars’ worth of securities, issued by various levels of Government as well as private companies.

The Bank of Canada took the benchmark rate to 0.50%, and additional measures to support financial markets, including a bond buyback programme and expanded purchases of Canada Mortgage Bonds. The Fed and the Bank of Canada have also opened or reopened facilities to engage in transactions that are traditionally out their remit, including lending directly to small and medium-sized companies or purchasing riskier types of assets. Finally, both central banks have reopened or extended swap line agreements that aim to ensure the availability of their currencies to international companies in times of financial volatility.

Further issues related to the economic impact of Covid-19

The very nature of the crisis questions the relevance of the tools deployed. Can extreme monetary policy, characterised by low, zero, or even negative interest rates and the injection of the equivalent of several percent’s of GDP in the forms of asset purchases, help lessen the impact created by Covid-19?

Based on the evidence of past QE initiatives in the US, it is not convincing there will be a major benefit to the national output. This has led an increasing number of economists to advocate the simultaneous use of fiscal policy, in parallel with the monetary initiative. However, we should distinguish among these measures, those that are aiming to provide income support while the production comes to a necessary halt during the fight against the virus, and those that will provide economic recovery once the virus has been dealt with or become manageable.

Topics that had attracted attention before the Covid-19 outbreak, such as inequalities and climate change, should be kept in mind when tackling the virus and providing recovery. Just like the difference in impact between stronger and weaker economies, and despite the non-discriminatory contagion of the virus, it can be argued that those at the lower end of the economic spectrum in the US are more susceptible to the negative impact of the social distancing measures, due to the lack of a cohesive social security safety net.

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