Posthaste: Sorry, but the economy is not over COVID, and won’t be for some time

CIBC economists see a long stretch of higher rates and lower growth ahead

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A lot of strange things have been happening in our economy lately. Roar inflation that took everyone by surprise, a tight drum working market and now the perspective of sizzling growthif not a full contraction.

The explanation for these unexpected and, in some cases, unprecedented conditions, CIBC economists argue, is that COVID continues to disrupt the workings of the economy.

Canada, the US and Europe have tried to ride out the pandemic, lifting vaccine mandates and restrictions on activity, resulting in increased consumer demand.

“But COVID is not fading away as a supply constraint or a health concern,” CIBC economists Avery Shenfeld and Andrew Grantham wrote in a recent note.

The more rapidly spreading variants meant more people died of COVID in 2022 than the year before, though fewer cases were fatal, they said.

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And while demand has recovered, supply chains have not, partly because of the war in Ukraine, but also because of COVID.

This year’s lockdowns in China are the most obvious example. Omicron’s restrictions here caused exports to fall even more than during the first shutdown of 2020.

In Canada it is showing up in employee sickness. “Flights are canceled when crew members call in sick, hospitals cut services because staff members are sick, and live entertainment shows are postponed for the same reason,” the economists wrote. Omicron has been associated in Canada with a significant increase in work hours lost due to illness.

Long COVID has caused some to withdraw from the workforce. The numbers are small in Canada, they said, but the UK serves as an example of what could happen if we fail to control future waves of the virus.

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In Britain, where public health restrictions have been lighter, 0.6% of the population has been “severely affected” by Long COVID, according to a recent study.

COVID is also affecting capital spending, the economists said. An uncertain outlook due to potential waves of the virus in the future may be contributing to companies’ reluctance to spend, but COVID supply chain issues have also made it harder to source capital goods.

“The result is lower production capacity in sectors where equipment is behind schedule or where COVID uncertainties have impeded investment,” they said.

The unprecedented COVID recession and recovery is also why there is a mismatch between job availability and hiring in today’s economy, economists argue.

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During the pandemic, some jobs were almost completely closed and sat idle for a long period. Now that the economy has reopened, those employers are struggling to rehire in large numbers, a situation we haven’t seen before, they said.

“In a typical recession, air travel doesn’t drop by 90% or live theaters shut down completely. A typical recovery does not see the sudden opening that we are experiencing in these same sectors,” they wrote.

Workers who held these jobs, such as restaurant staff and baggage handlers, in 2020 had two years to move, as opposed to a typical recession that lasts only two to three quarters.

CIBC believes this imbalance will eventually even out, but the impact of COVID on supply chains and lost work could remain.

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So what does the future hold?

While traders are already talking about rate cuts after the hike cycle ends later this year or early 2023, CIBC expects the Bank of Canada to keep rates at 3.25% for all of 2023.

It also forecasts GDP growth to slow to 0.9% in the fourth quarter of this year and rise to just 1.5% in 2023.

“Even if a recession is averted, we are in for a prolonged period of below-average growth,” the economists said.

The policy of removing COVID mandates meant to improve the economy may actually be working to spread the economic costs of the virus, they said.

“While it helps on the demand side, eased public health restrictions, particularly during case count surges, are squeezing the supply capabilities of the economy. Their absence is likely to raise peak levels of COVID cases and thus increase the costs of absenteeism for workers and perhaps, as we have seen in the UK, risk longer-term labor market damage. due to Long COVID,” they said.

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Economists said lockdowns should be behind us, but a push for mask wearing, global vaccination and improvements in indoor air quality would help reduce the economic impact of COVID.


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Today’s Posthaste was written by Pamela Heaven (@pamheaven), with additional information from The Canadian Press, Thomson Reuters and Bloomberg.

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