Amyot Gélinas, s.e.n.c.r.l.’s new Les Grandes entrevues series features an interview with Pierre Cléroux, Vice-President, Research and Chief Economist at the Business Development Bank of Canada (BDC).
As deconfliction quietly gets underway around the world, we spoke to this well-known business personality.
A viewpoint on several issues
There’s no need to dwell on an economic retrospective of the last three months; every business has been and will continue to be marked by the Covid-19 bucket. A nightmare for some, an opportunity for others, the pandemic turned everything upside down. Today, this financial earthquake leaves in its wake legitimate questions about the economic future of the country, and indeed the whole world. Even if governments around the world are multiplying measures to help the population and businesses, the need to revive the economy in the first instance, and reduce debt in the second, resounds like a call for mobilization.
“In both Canada and Quebec, the accumulated debt will be enormous,” notes Chief Economist Pierre Cléroux. “The federal government has spent over $300 billion to help people and businesses. As for Quebec, spending varies around $15 billion, but in both cases, it will take several years to return to a balanced budget.
The impact of Covid-19 was enormous. Severe enough to push the unemployment rate to an all-time high of 17%. A glimmer of hope, however, as we note with relief that the recovery is well and truly underway, generating a sigh of relief, and… a fall in the unemployment rate.
“As we deconflict, people are getting their jobs back. In the short term, thousands of people will go back to work, and the unemployment rate will drop rapidly.”
That said, let’s not kid ourselves. It will be some time before we return to pre-crisis economic activity. In this respect, we’re keeping a close eye on what’s been happening in other countries since decontamination. Prudence seems to be the watchword,” notes Pierre Cléroux. Caution on the part of consumers may explain the sluggishness of the recovery.
“The caution is also due to health reasons. Even if stores are open, or are in the process of opening, traffic will be lower than before the crisis,” he maintains.
If some people avoid going out for fear of getting sick, others will be financially cautious; the last two months having left a strong mark on Quebecers and Canadians with countless job losses.
“Even those who have kept their jobs are delaying their purchases, especially in durable goods, such as homes or even automobiles.”
Construction… Manufacturers…booming
In times of crisis, many companies have had to redefine their business orientations. Whether through mass production of masks, hospital garments, disinfectants or visors, the pandemic added a dozen or so goods suddenly deemed essential for an entire population. While some business sectors were able to take advantage of this windfall (often thanks to their company infrastructures), the construction sector topped the list for fastest recovery. Better still, says Pierre Cléroux, it’s a sector that will see the highest growth.
“The Quebec government is going to inject a lot of money into infrastructure, which will boost the construction sector.”
Notwithstanding the pandemic, another sector seems to have been relatively unscathed so far. Although many manufacturing jobs have been lost in recent months, some 79,000 jobs have been created in Canada and 250,000 in the United States.
How do we explain this rebound in the manufacturing sector?
“Demand is picking up, and people are consuming more. What’s more, the manufacturing sector allows for greater flexibility when it comes to social distancing measures and work reorganization, much more so than the retail sector, for example. We’ve been looking hard at China, because it was the first country to be affected, but also because it was the first country to decontaminate (45 days ago). We note that the manufacturing sector is the one that has recovered most rapidly. Yes, the downturn was drastic when the containment measures were introduced, but the recovery has been rapid too. We’ve seen this in other countries too.
Information Technology
The same is true of information technology. With the pandemic proving the effectiveness of teleworking, demand for digital transformation has exploded.
“During the crisis, online commerce in Canada increased by 40%. Our consumer research showed us that 54% of Quebecers had bought online during the crisis for the first time in their lives. I can’t hide the fact that I was very surprised to learn that so many people had never bought online before”, says Pierre Cléroux, “78% of them confirmed that they will continue to do so. And why? Because they’ve got used to it and seen the benefits, but also for security reasons. You can’t catch the virus from behind your computer.
As the Business Development Bank of Canada asks companies about lessons learned during the pandemic, they confide in us about their digital presence. “Clearly inadequate”, say many. Some will even go so far as to claim that this is the reason they couldn’t make it through.
In this lessons-learned survey, companies lift the veil on another problem they encountered during the crisis.
Liquidity management.
“Yes, it’s the number one factor. Everyone now wants to have more reserves, more liquidity, more cashflow. It’s not surprising, people have been scalded and surprised. The crisis arrived so quickly that they found themselves short of cashflow.”
Although debt levels are higher today, they are still low for Canadian companies. Better still, it’s lower than the historical average, which means that Canadian companies (on average) weren’t heavily indebted before the pandemic.
Investments
“After every recession, we see what we call a slowdown in investment,” explains Mr. Cléroux. “There will be no exception this time. It’s going to take time before companies have the financial capacity to invest. Both in Canada and Quebec, we expect investment to be much lower than in the past.”
The BDC’s chief economist is dismayed by this finding, since investment in Quebec had been on the rise for several years.
“But as the economy improves, people will reduce their debt levels and have the capacity to invest again.”
BDC’s quarterly survey of investment intentions in January 2020 confirmed that these were very positive, with companies looking to invest even more this year. Unfortunately, April changed all that.
“And it collapsed. We weren’t surprised,” notes Pierre Cléroux, “But we asked them again about their investment intentions over the next 12 months. The majority of companies told us they will be investing less than last year. Although investment levels are lower, everything will return to normal, but gradually.”
After Covid-19
Based on data from the last recession in 2008, it took three years for investment to return to pre-recession levels.
Although the current crisis was as sudden as it was unpredictable, it should not take as long to conclude as its sister crisis.
“It’s not a financial crisis, it’s a shock, and people are bouncing back. We’ll have to wait until mid-2021 to get back to pre-crisis levels of investment. Probably even 18 months before we return to the level of economic activity we had before the pandemic”, concludes the Vice-President, Research and Chief Economist of the Business Development Bank of Canada (BDC).
