OPINION: COVID-19 recession scenarios for B.C.: one is bad; one is worse 

click to enlarge Photo courtesy of Business in Vancouver
  • Photo courtesy of Business in Vancouver

By now it is clear the economic fallout from the coronavirus pandemic will be widespread and unusually painful.

The shuttering of much of the provincial economy is unprecedented. The halting of international air travel has profound implications for tourism, business travel and family visits. International supply chains have been disrupted, hurting local manufacturers and many other firms. How long B.C. businesses will be closed is uncertain. In these truly uncharted waters, estimating how far the economy will slide is something of a guessing game.

Still, it is useful to try and understand the impact of the crisis across the industries that make up the B.C. economy. To that end, we recently developed two scenarios for 2020. Both recognize that, prior to the pandemic, growth in the provincial economy was already slowing. Both scenarios also assume a global recession is coming (or is already underway) and that the downturn will extend to North America. This broader context is important, because it means the province's industrial base and export sector-much of which could continue to operate with appropriate safety precautions-will be affected by weaker foreign demand for B.C. goods and services.

The first scenario anticipates the widespread lockdown and closing of non-essential B.C. businesses is maintained for eight weeks. Looking at the recent experiences of other jurisdictions, containment will likely take more than eight weeks, so some business closures are apt to continue into the summer months. We assume bars and restaurants are permitted to open in the second half of the year, perhaps with new social-distancing guidelines in place. This scenario also sees international travel as greatly restrained for five or six months. Beyond then, cross-border travel may be discouraged by governments due to fears that the virus will be re-introduced to the domestic population by foreign visitors.

Under our baseline scenario, the B.C. economy contracts by approximately seven per cent in 2020-a very steep recession by historical standards. Given all the uncertainty, it is better to think about a decline in GDP in the range of six per cent to eight per cent. For context, during the 2009 Great Recession B.C. suffered a 2.6 per cent drop in real gross domestic product. This recession will be worse.

A decline in GDP of seven per cent is massive. But our estimate reflects the combined effects of the virus itself, the extraordinary measures being implemented to contain it and the onset of recession globally and in North America.

By our reckoning, output in the air transportation, accommodation, food services and entertainment sectors is set to fall between 30 per cent and 50 per cent this year. With most stores closed and millions of British Columbians essentially stuck at home, GDP in the retail sector will plummet-even if a few retail segments remain busy. Consumer outlays will jump when the restrictions are removed, but by then some businesses will be gone, and many shell-shocked households will be rebuilding their balance sheets and less inclined to spend on non-necessities.

Outside of consumer-facing sectors, some other notable B.C. economic engines will also sputter. We project that GDP in the residential construction industry will fall as developers pull back. The manufacturing sector-which is heavily exposed to international trade-will also take a hit. The impact will differ across segments, but against the backdrop of a global and North American recession, we have pencilled in a 17 per cent drop in overall manufacturing GDP.

The once booming film and television sector came to a shuddering halt as the virus took hold. Spending on a range of professional and technical services will also experience a substantial fall in output as demand from businesses in other industries wilts. Our analysis accounts for the fact that a few industries will expand, including health care, public administration, telecommunications, data processing and delivery services.

The second scenario assumes business closures are in place for longer, travel restrictions are slower to be lifted, and the worldwide recession is deeper. With closures extending through the summer, there are more business insolvencies and some furloughed workers have no jobs to return to. In this even bleaker scenario, the provincial economy could shrink by 10 to 12 per cent.

Decreases in economic output in the seven to 12 per cent range are unprecedented. It is possible we are too pessimistic. Some or most business activity could resume sooner than we are assuming. But at this stage we view this as unlikely.

Even if B.C. is more successful than most other jurisdictions in containment, protracted travel restrictions, malfunctioning international supply chains and the arrival of a global recession are destined to weigh on our economy for the rest of the year.

Jock Finlayson is the Business Council of British Columbia's executive vice-president and chief policy officer; Ken Peacock is the council's chief economist.

This story originally appeared here.

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