TD Chief Economist on COVID-19’s global economic impact and recovery outlook

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- Hello, and welcome to MoneyTalk's COVID-19 daily bulletin for Wednesday, May 6. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Beata Caranci, Chief Economist, TD Bank Group, about the global impact of COVID-19 on economies. But first, a quick wrap of today's headlines.

The US job market continues to struggle under the weight of the coronavirus. The latest ADP report shows private payrolls plunged by more than 20 million in April, the worst job loss in the history of the report. More bad economic news, the EU predicts the region will contract 7.4% this year due to COVID-19, which would represent the worst economic shock since the Great Depression.

On the earnings front, Shopify reported a surprise quarterly profit and higher sales, as more users visited its platform after COVID-19 lockdowns led merchants to move their businesses online. Meanwhile, Disney's profit dropped a whopping 91% during the first three months of the year, revealing the widespread damage the coronavirus pandemic has brought to the Magic Kingdom.

Finally, a Dutch restaurant has come up with an idea on how to offer classy outdoor dining in the age of coronavirus-- small glass cabins built for two or three people, creating intimate cocoons on a public patio.

And that is a wrap of today's headlines. Next, Kim Parlee's conversation with Beata Caranci.

- Beata, the advanced economies are getting hit significantly harder than emerging economies in 2020, although everybody is getting hard. Why is that happening?

- Well, one is that as part of emerging markets, you have China in there. And China went through an earlier phase than what we saw in advanced economies and is already on the recovery side. And they do make up a large share of emerging markets. Advanced economies, much of the economic shutdowns happened in March, spilling right through April into May. And so what we're already getting is GDP data is quite dire in those regions.

So Europe, we had first quarter contractions as high as 14% for the eurozone. For the US, we're at around 5%. We don't have Canadian data, but we do suspect it'll be close to 10%. That's the first quarter, and that's not even the depth of the recession. The depth starts to happen inside of April, which spills into your second quarter. Those numbers look like they could be around 40%. So part of this is timing, and then the way the recovery cycles are working.

- Let's see if we could delve a little more into Canada and the US with regards to GDP and jobs. You talked about the first couple of quarters, but looking beyond that, what do you see?

- Well, the jobs report, which we're going to get out on Friday for the month of April, both US and Canada, that will likely be one of the worst reports we're ever going to see in terms of substantial job losses. So we know, for the US, they've seen 30 million jobless claims filled-- this is for insurance claims-- in six weeks. So that's an incredible amount of unemployment that's happened in a short period of time. We think Canada will have job losses in the range of 3 to 4 million just for the month of April. This follows about a million of job losses in the month of March.

So we are hitting the depths of the worst numbers in April. And what matters now is, as we go into May and June and July, as we have reopen strategies being announced by governments, how much of those workers come back online other than for factors like the wage subsidy program in Canada, which we do know that employers are bringing back workers, the wage subsidy is paying 75% of their income, but their hours may still be zero. So they're attached to their employer, but not necessarily doing anything at this stage because that employer is not using them in a productive way.

So what really matters is, when we get into those summer months, do those workers come on on a productive capacity way because neither the government nor the employer would be able to basically bridge that period for a very long time. So we basically have until the summer to when we're going to start to see how this recovery is shaping up.

- I know you were speaking earlier to a group of folks talking about what history has shown us in terms of the longer-lasting impacts of unemployment. Can you just elaborate on what that means, and what that's going to mean for, you know, quote unquote restarting the economy? Because it's not going to be just turn it all on and off we go again.

- Yeah, they're very staggered, slow plans. So what we've already seen in the March employment data-- and we'll see if it gets further entrenched in April-- is a disproportionate impact to the younger population. So if you look at those aged between 15 and 24 years old, they accounted for 40% of the job losses in March. And that's about three times more than their share in the labor force. So that's quite a large representation. A lot of those in part-time segments, but not exclusively so.

So what we do know is, when you have periods of recession-- this is where longevity really matters, if the economy doesn't get back on track-- the scarring to that segment of the population can actually be quite long-lasting. There have been what's called longitudinal studies where they follow people through time as they age. And those have showed, in past recessions, it could take 10 to 15 years to get back to what your earning potential would have been had you graduated in a better economic time. So luck matters in terms of the timing of when you enter the workforce.

Clearly, employers are going to be oversupplied with labor initially, because we're seeing these really staggered openings. And so therefore, that younger population may not have very many opportunities to build up skills. And so what you could see is, as you get into next year and the year beyond, you might see people trading the level of what they're able to do for a lower qualified job, so you see more underemployment as a result as we go forward. So that generation is likely going to carry the scars. Even though we think it will be a relatively short period of deep contractions in the Canadian economy, that recovery side and the scarring can actually last for quite a long period of time.

- Obviously, that's something that's going to hit everywhere, not just Canada. But so if we move to the States, what are you seeing there in terms of we're starting to see the beginnings of some openings.

- We are. Very uneven, various states pursuing different policies. What we are seeing is that there is not a rush, even as retailers open, there's not a rush of consumers out. And that's largely because they don't feel that their safety can be guaranteed in this situation. And we saw the same thing happen in China. So it will take time to build confidence and for people to feel comfortable in exiting their home and moving around the country. Public spaces has been one of the areas that people feel very comfortable in getting out into parks and beaches. That does not drive jobs and economic activity, so while it's good for mental health, it's good for exercising, good for socializing-- and we're all missing that-- it's not the one that creates the catalyst that gets you into a higher economic environment.

- You mentioned China in terms of watching to see what they were doing. I mean, what are you seeing or not seeing, I guess, in terms of how you understand what a path to recovery looks like there?

- Yeah, so China, first in, first out, right? First ones to do the social distancing and to have the impacts. And we're already seeing a recovery take hold there. We saw it with the March data, both in manufacturing and in services. Manufacturing led, and services came at a more staggered rate. Now, we do have April data for China, as well. The good news is that it wasn't like you just got this dead cat bounce that March started to recover and then it petered out in April. It does look like the momentum is building on itself, which is good. As more time progresses, more people are starting to come out, get used to the social distancing, and interact a bit more with retailers and restaurants and others. So we hope to see a similar pattern in North America, but it will depend on the amount of population confidence in the system.

- I'm curious about, you know, when you take a look at maybe not one, two, three, but further out, in terms of number of years out, I have been oscillating between, oh, there's not enough time here for behaviors to really change to, oh, this is going to be profound. Where do you land? What does the global economy look like a few years because of what's happened now?

- Well, I think this all depends on the health outcomes. So what we generally see is people generally are mean-reverting, meaning you tend to go back to old habits. But you have to feel comfortable in doing so. So in the event that there is a vaccine, in the event that maybe not even a vaccine, but a good treatment course that would limit stays in the hospitals or improve outcomes on survivorship, this would probably give people more confidence to start to behave more like they were pre-crisis than where we are today.

As we go forward in the future, there is a bigger impact when we think of what's happened in terms of policy responses. So we will have interest rates, we think, persist at a very low level for a long period of time. So even as we get to the economic recovery stage, it's much easier for the central banks to cut rates than it is for them to increase interest rates. There will be excess slack. So we think we could be in for a long haul with very low interest rates, and it'll persist much longer.

And then the other factor where when we look into the future that's not going to be easy to unwind is the amount of government spending that's occurred. We've seen government spending at about six times the rate of what we would have experienced during the global financial crisis. So we are ending up with much higher levels of deficit and debt. And that suggests that someone's going to have to pay the piper. This is not money that just comes out of thin air. And so that legacy, when we're in the recovery stage, will have to shift from the government being supportive to having to make harder choices on where they're going to spend their money, and also where they're going to get their money, so the tax base. So there may be higher incidences of taxes as we go forward.

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