The Quebec government this week announced new stricter lockdown rules before the holidays, yet repeated lockdowns, even if partial, are likely to inflict the effects of an economic depression on SMEs rather than those of a simple recession, an economic note prepared by Peter St. Onge in collaboration with Maria Lily Shaw on behalf of the Montreal Economic Institute (MEI) warns.
“During the first COVID-19 lockdown, the unemployment rate in Canada reached 13.7%, a level not seen since the Great Depression,” says St. Onge, a senior fellow with the organization. While the effects of the first lockdown were largely temporary, economic analysis tells us that repeated lockdowns erode the confidence of entrepreneurs and can have permanent consequences.
“The second wave of lockdowns is demoralizing for job creators. A Federation of Independent Business survey found that 56% of SMEs think they might not survive it,” adds the economist. “These are not just some abstract numbers. If a large number of commercial establishments disappear, the urban landscape will be erased.”
Shaw, an economist with the MEI, contends “it is difficult to evaluate the direct consequences of the lockdown measures put in place. But the economics is clear on this point: Each lockdown will be more destructive than the last for our economy and our small business owners.”
Repeated lockdowns, even when partial, may be converting a temporary crisis akin to a natural disaster into an ongoing depression for the small and medium-sized businesses that employ nearly 90% of Canadians who work in the private sector, the two say.
“Research on actual natural disasters and on temporary tax changes suggest that the simple act of extending the duration or frequency of a threat can dramatically magnify its impact, potentially ballooning to many times higher in the long run.
On Oct. 26, Quebec extended its new “partial” lockdowns another four weeks, as the original “next few weeks” of restrictions now stretch into eight months and counting. Unfortunately, the carnage for small business, and for the jobs they sustain, is anything but partial.
“The first COVID-19 lockdowns have already been economically devastating to Canadians, leading to unemployment peaking at 13.7%, the highest level since the Great Depression. What is more, economic analysis suggests that continuing or repeat lockdowns, even if milder, could paradoxically cause greater harm. This is because a one-time lockdown destroys wealth, to be sure, but leaves economic incentives largely intact.
“In contrast, recurring lockdowns, even if partial, risk causing permanent harm in particular to small businesses which now must take into account an ongoing risk of catastrophe. A wide economic literature on natural disasters and tax changes suggests that permanence alone can dramatically increase the destruction, even if ongoing lockdowns are only partial.”
The two write that “Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), recently released a survey that found that eight in 10 small businesses in Canada are specifically concerned about the second wave of lockdowns, with 56% saying they might not survive it.
“Kelly told of receiving 60,000 calls from worried small business owners, many even considering suicide as their small businesses collapse.
An estimated nine in ten small businesses have experienced catastrophic falls in revenue averaging 70%, and employee numbers have been cut in half, with one in ten businesses laying off their entire staff. Kelly underlined that even for surviving businesses, the vast majority were losing money every day while hoping for a quick reopening, but that a second wave will “burst that bubble.”
The MEI analysis can be accessed via the following link.