The Impact of COVID-19 on Canada’s Economic Recession and the Ongoing Inflation Crisis

By: Lianne Ouellette

Edited by: Emilia MacDonald

As we approach the third year since the beginning of the COVID-19 pandemic, masks and social distancing seem a thing of the past. However, Canadians across the country still struggle to meet the expense of basic everyday necessities. The pandemic’s subsequent recession had complex and varied effects on economies around the world. While the pandemic initially caused a sharp economic contraction, Canada’s safety from affordable living is nothing but an illusion due to inflationary pressures. From spiked grocery store prices, to “out of stock” signs flooding empty aisles, the Canadian government is attempting to alleviate the spiked cost of living by restoring a post-recession economy.  

The sharp drop in economic activity during COVID-19 indicated that the 2020 recession would be unlike any recorded in economic history. The recession was characterised by an abrupt contraction in the Canadian economy due to lockdown measures and minimal economic activity. Businesses were forced to operate under restrictions. Employers struggled to hire workers, and businesses had to raise prices in order to offset the surge in cost of labour and materials. The most devastating occurrence is arguably the mass amounts of jobs lost due to layoffs and closures. In the month of April alone, the unemployment rate soared to 13% as the full force of the pandemic hit, with the Canadian labour force losing a record high of just under two million jobs in 30 days. To provide financial relief, the Canadian bank implemented fiscal stimulus, the Canada Emergency Response Benefit (CERB) and wage subsidies in hopes of motivating employees and employers to spring-back into jobs when businesses reopened. To sustain monetary stimulus, The Bank of Canada simultaneously lowered interest rates to 0.25%, keeping payments on existing and new loans low and affordable. The Bank of Canada was proactive in their response to the recession brought on by the pandemic, but the question is: did these measures contribute to the inflationary gap that Canada faces as a consequence of the pandemic? 

 A non-linear relationship exists between Canada’s ongoing inflation crisis and the long-term nature of policies implemented during the pandemic. After a plunge in Canada’s inflation rate in 2020, a 33-year high of 6.7% was observed in March of 2022. The Consumer Price Index measures the overall change in consumer prices based on a representative basket of goods and services over time. Additionally, Canada’s CPI rose by 6.8% on an annual average basis in 2022, following gains of 3.4% in 2021 and 0.7% in 2020. The increase in 2022 marked a 40-year high, with prices for transportation, food and shelter as the top three factors. In 2022, goods and services (primarily food and gasoline) rose at a faster pace than in 2020. Inflationary pressure intensified due to increased government spending and a surplus of money in circulation. 

2022 marked the easing of restrictions and the reopening of the economy. Markets were met with pent-up consumer demand, but disruptions in supply chains resulted in the rapid increase of the cost of goods and services. Companies were unable to meet soaring demands as the cost of raw materials increased, transportation became delayed, and labour shortages resulted in a reduced supply. The cherry on top? Persistently low interest rates, which only recently escalated to 4.75% in January of 2022. 

The COVID-19 pandemic caused a recession due to the atypical recovery processes that economies worldwide employed to recover from an unprecedented global event. The Bank of Canada has now reduced inflation and their CPI to 4%, which numerically represents an immense improvement. However, the increased cost of living and erosion of purchasing power counters the belief that better times are coming in Canada. Stemming from essential responses to the economic recession, today’s economic crisis is a testament to the complexities of economic policy during tumultuous times. Finding a delicate balance between controlling inflation and fostering economic growth is paramount in ensuring Canada’s economic resilience in the post-pandemic era.

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Image Citation:

Expensive receipt. (n.d.). photograph.