Economic fallout of pandemic restrictions weakened over time

The economic fallout from Covid-19 health restrictions was most severe when the pandemic first hit but weakened during successive waves, according to new research from Statistics Canada.

“During the first wave, the correlations between changes in economic restrictions and changes in economic activity were stronger,” a report from the national statistical agency said.

StatsCan found the average correlation between changes in restrictions and changes in retail sales during the first wave was -0.78, compared with -0.31 during the second and third waves.

The correlations between changes in restrictions and changes in employment and in the number of active businesses weakened over time, too.

“The change in the response of the economy to restrictions likely arises from the greater uncertainty around Covid-19 when it first emerged, from adaptations that businesses and households undertook to enable greater operation in the face of restrictions, and from adaptations in how restrictions were implemented and enforced,” StatsCan said.

Additionally, the research found strong threshold effects in later waves. At low levels, restrictions slowed growth, but beyond a certain threshold, tougher restrictions were associated with declining economic activity.

In particular, it found that once restrictions went beyond an inconvenience (such as wearing a mask, or capacity limits) to a genuine burden (such as school closures and non-essential business shutdowns) this marked a level where increased restrictions “can lead to more noticeable changes in activity.”

For instance, the study found that below a given threshold, increasing the severity of restrictions by 10 percentage points saw retail sales growth slow by 0.4 percentage points, but above the threshold, a 10-point increase in restrictions had a 1.0% impact on retail sales.

Similarly, the impact on employment growth was 0.2 points below the threshold and 0.6 points above the threshold.

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