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Canadian Economic Update

2021: A Year of Recovery

RBC’s Deputy Chief Economist Dawn Desjardins, in an exclusive presentation to RBC Investor & Treasury Services clients, is forecasting a year of economic recovery for Canada in 2021:

1. Vaccinations and policy support will drive growth

While news about the distribution of vaccines has brightened the outlook for the global economy, it is still riddled with uncertainty given recent surges of COVID-19 cases and variants.

On balance, however, the global economy has maintained momentum and continued to experience periods of growth, despite lockdown measures. The magnitude of decline originally expected in 2020 was almost a full percentage point more than what was realized.

Forecast growth for 2021 is 5.5%, which reflects the fact that some governments, such as the US, have introduced another round of fiscal stimulus. The pick-up of vaccination rates will also, over time, allow economies to open on a more sustained basis.

2. Interest rates will remain very low

Central banks remain committed to keeping interest rates at extraordinarily low levels and are not expected to make changes throughout the course of the year. Potential changes in 2022 would be gradual and relatively limited.

While we continue to experience successive waves, they are having less of an impact on our ability to grow the economy

3. Canada’s economy is expected to recover pandemic losses by year end

2020 was marked by a sharp decline in economic activity, with GDP dropping almost 18% in March and April. The ability of businesses to adapt to the new conditions and pivot to make goods and services available online was a key turning point in helping to buoy economic growth in the second half of 2020. At the end of 2020, GDP was approximately 3.2% below where we were when entering the pandemic – and a significant shift from the 18% mark.

Furthermore, according to Statistics Canada1, Canada’s economy grew 0.7% in January and a further gain is expected in February. While we continue to experience successive waves, they are having less of an impact on our ability to grow the economy. By the end of the third quarter, we expect to have fully recovered the loss of economic output incurred due to the pandemic.

4. Job recovery will be slower, particularly in certain industries

The labour market was clearly under significant pressure and almost three million jobs were lost over the course of six weeks in March and April 2020. Since then, almost 2.4 million jobs have been recovered, although industries where social contact is essential, such as accommodation and food services, have continued to struggle. Job losses in that sector remain large relative to February 2020.

Professional services, such as educational services, finance, insurance and real estate, have created more jobs as many of these roles can take advantage of remote work. The demand for labour, however, is uneven both by industry and by who is being most dramatically impacted.

5.  The pandemic has impacted lower-earning women harder

Fifty-eight percent of the 600,000 jobs that are still to be recovered were performed by women. And while women are dominant in the health and education sectors, which have experienced recoveries, they are also dominant in those industries where job losses continue to be significant, such as food and accommodation and retail.

6. 10 times more women than men have left the labour force since February 2020

In addition to the sectoral divide, women and men who have lost their jobs are largely at the lower end of the wage scale. Furthermore, women have also tended to leave the labour market more aggressively than men by a scale of 10:1 and more women have joined the ranks of long-term unemployed (i.e., not employed for at least half the year). The number has tripled for women, and doubled for men.

7. The uneven recovery will continue

Some industries have broken even or may even be running at a greater level of output; however, recovery is expected to lag for other industries, such as hospitality where ongoing constraints due to physical distancing measures will continue to exert financial pressure.

8. Savings have surged and some will be redeployed in 2021

Government programs were aggressive and helped drive incomes up. In some instances, the replacement rate of income was greater than what people had been earning pre-pandemic.

As far as use of those funds, retail sales are running higher but savings rates have also climbed. For lower wage households, those funds may have been saved to continue to meet ongoing financial demands.

Pent up demand will see the deployment of savings to either pay down debt, or consume goods and services

Higher-wage workers have amassed considerable savings, almost CAD 200 billion by RBC’s estimate, with fewer opportunities to spend on recreational pursuits, dining out, etc. We expect that as we are able to reopen, pent up demand will see the deployment of those savings to either pay down debt, or consume goods and services – a key requirement for our economy to continue to grow.

9. Housing markets have recovered more quickly than expected

The housing market recovery has been aggressive, impacted by low interest rates, changing demands for housing that can accommodate work from home, combined with the stockpiling of savings. In the first couple of months of 2021, sales were up 40% from pre-pandemic levels. As a result, home prices have also risen aggressively with average prices sitting 25% higher than a year earlier.

This has impacted affordability conditions, which have deteriorated across the country as supply is not keeping pace with demand. Demand may start to cool as immigration numbers remain low, but perhaps not until 2022.

10. Businesses are optimistic

According to a survey by the Canadian Federation of Independent Business2, with respondents from small and medium-sized businesses, there is greater optimism on the three-month outlook. While this may be temporarily muted as variant cases rise, it is a positive signal nonetheless.

The Bank of Canada Business Outlook Survey3 conducted from mid-November to early December 2020, noted that one of the key concerns, second to domestic demand, was labour shortages. It is notable, however, that 43% of companies surveyed intend to hire over the year ahead and a quarter indicate they intend to spend on machinery and equipment.

The combination of increased consumer spending and business investment bodes well for Canada’s continued economic recovery and growth.

For further details, please refer to Dawn’s presentation, available here.

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  1. Statistics Canada (March 31, 2021) Gross domestic product
  2. Canadian Federation of Independent Business (March 25, 2021) Business Barometer
  3. Bank of Canada (January 11, 2021) Business Outlook Survey – Winter 2020-21