Regardless of the direct impact of pandemics on economic activity in Canada and globally, it’s their psychological effects on economic participants that pose the deeper risk.
So while economists continue to predict just a modest and temporary Canadian slowdown from the China-based coronavirus outbreak, it’s less comforting that the segment of the economy most directly in the line of fire is the already confidence-challenged manufacturers.
Two weeks ago, I wrote in this space that the impact on the Canadian economy from the coronavirus looked likely to be less than that of the 2003 SARS outbreak, a pandemic that hit Canada particularly hard – and that nevertheless shaved fewer than 0.2 percentage points off the country’s real gross domestic product growth for the year as a whole.
Now deeper into this outbreak, with authorities mostly successful in preventing the spread of the virus into Canada (unlike the serious outbreak of SARS in Toronto 17 years ago), the prospect of a SARS-style hit to the economy looks increasingly unlikely.
Last week, the Office of the Parliamentary Budget Officer estimated the coronavirus would reduce real GDP growth by 0.3 percentage points annualized in the first quarter of 2020 – about half of the estimated impact of SARS in the second quarter of 2003, the peak period for that outbreak. It did caution, however, that “estimates of the overall impact of the coronavirus are highly uncertain at this time.”
While the impact of the virus itself in Canada looks destined to be much smaller than with SARS, the role of China in Canada’s economy has grown since that time – as several readers were quick to point out in response to my previous column. In 2003, China represented 1.3 per cent of Canada’s exports and 5.5 per cent of its imports; today, it accounts for 3.9 per cent of exports and 12.5 per cent of imports.
The combination of those two forces suggests that the channels through which the economic impact of coronavirus is felt in Canada are certain to look different than they were with SARS. Where SARS primarily hit the retail sector, coronavirus looks more likely to be felt in manufacturing.
“The biggest effect ... could be disruption to supply chains,” Canadian Imperial Bank of Commerce economist Andrew Grantham wrote in a recent report.
Since SARS, globalization and trade liberalization have led to a much deeper integration of global supply chains, while over the same time China has grown dramatically as a manufacturing power. The result is that Canadian manufacturers are reliant on a lot more Chinese-made components than they were in the SARS era.
Mr. Grantham cited data from the Organisation of Economic Co-operation and Development showing that the content of Chinese-made parts in Canadian transportation manufacturing “almost tripled” from 2005 to 2015; makers of machinery and other key manufacturing segments “saw similar increases.”
“Delays in sourcing parts could have a significant impact on Canadian production and export growth in the months ahead,” he said.
So far, we’re only talking about a few weeks of disruption. Companies carry inventories for a reason; relatively short-term disruptions of parts supply, regardless of scale, shouldn’t force them to close their doors or dramatically reduce output. Nevertheless, the longer the coronavirus outbreak disrupts Chinese production and transportation, the more likely this will throw a wrench into the Canadian production that China supplies.
The effects of coronavirus-related uncertainties on business sentiment are something else entirely.
Having spent the past decade on the uncertainty roller coaster, the world’s manufacturers, including those in Canada, have become highly attuned to caution. Retreat from risk has become standard – and it typically manifests itself in delayed and reduced investment.
We don’t necessarily have to see the physical evidence of a slowdown in economic activity before manufacturers duck back into their foxholes. Remember that fears of escalation of the China-U.S. trade war crippled global manufacturing investment last year, and the unsure outcome of North American trade talks weighed on Canadian business spending for the better part of the past three years.
We probably won’t have a good read on how the coronavirus has affected confidence among Canada’s manufacturers and exporters for several weeks yet. The first indicator could come in early March, when new employment data will provide a glimpse into hiring decisions in February.
Much stronger and more detailed evidence will come in early April, when the Bank of Canada publishes its quarterly Business Outlook Survey. Only then will we have evidence of how the coronavirus has affected the confidence of Canada’s manufacturers and exporters – and how serious a setback it has been to their willingness to invest.