Peter Hall, Vice-President and Chief Economist at Export Development Canada (EDC), shares his perspectives on the post-pandemic economy and its impact on trade as discussed during a recent virtual session.
What is your view of the current global economic outlook?
There have been massive upward revisions of economic forecasts recently in anticipation of the post-pandemic recovery. The U.S. Federal Reserve hiked its 2021 growth forecast for the United States to 6.5 percent from 4.2 percent, while the Organisation for Economic Co-operation and Development (OECD) doubled its forecast for the United States to 6.5 percent from 3.2 percent.
At EDC, we raised our 2021 forecast for growth in the United States to 6.3 percent, a boost of over two percentage points from the autumn outlook and increased our call for global growth to 6.4 percent for 2021, with a robust 5.4 percent forecast for 2022. The improved economic outlook will anchor the worldwide forecasts: China's early rebound suggests strong support for its 10.8 percent bounce this year, while India is expected to see a whopping 12.3 percent.
We anticipate that Canada will see a rebound of 5.5 percent in 2021, followed by an above-average 4.1 percent growth next year. This follows a decline of 5.3 percent in 2020, which is obviously due to the pandemic shutdowns.
Is the rebound being driven by government stimulus?
We don't see these rebounds driven by stimulus alone. We came into the COVID-19 pandemic with very strong pent-up demand. That's the opposite of pre-recession conditions, which suggests we have a lot of capacity to grow. Many people kept their jobs and were getting a full salary throughout the shutdowns and, because they couldn't go out, had far fewer things to spend money on. We have a massive wave of demand coming our way as the economy fully reopens.
This is an economy that is ready to spring to its feet very quickly.
I also think it's incorrect to compare the current rebound with the one that occurred after the 2008-2009 recession. We had a massive bubble of excess activity before the global financial crisis. This time around, it’s the opposite. This is an economy that is ready to spring to its feet very quickly, and that's what's taking many economists by surprise right now. It's causing a little bit of volatility, but I believe that our monetary authorities will be able to act in time to keep things running smoothly.
What are you telling exporters?
We've got pent-up demand. We've got a vaccination rollout that's going reasonably well. And we've got this shot in the arm coming from the stimulus packages. What more could we need to understand how much of a burgeoning year this will be? We're telling exporters all across the country that this is 'fasten your seatbelt' time because there will be more demand than they can furnish. And indeed, economies are bumping into capacity constraints right now.
We're trying to get businesses as prepared as they possibly can be to accommodate this growth.
We're trying to get businesses as prepared as they possibly can be to accommodate this growth. It's the businesses that are fully prepared and ready to go that will capitalize. We want Canadians and Canadian exporters to be at the front of the line.
How will different sectors be impacted?
Not all industries are equal when it comes to their COVID responses. The agri-food sector, the building supplies sector, big tech and telecom are all doing quite well at the moment. On the other side, industries such as energy, travel, arts and entertainment have been the hardest hit. It's the classic 'K-shaped' recovery.
Industries like travel and tourism are poised to make a comeback as more people are able to travel further afield again. There has also been an unexpected resurgence in energy prices that is expected to continue as the economy ramps up. While there is growth in 'green' energy, the reality is that we're still going to be using roughly the same amount of oil and gas per capita as we did before the pandemic. Non-energy commodity prices such as base metals and lumber are also outperforming.
Canada depends on trade for about two-thirds of its GDP. There are countries out there that are also experiencing a K-shaped recovery. We need to focus our attention on those and find opportunities.
What about the inflation concern and interest rates?
Money is piling up inside demand deposits. Imagine if this money comes into the economy in one wave of spending. We are already seeing signs of rising inflation and there is a danger that market psychology is substantiating it. In reality, demand isn't the problem; supply is. The shutdowns have created choke points and that's why we are seeing prices rise. We're going to have to deal with this but I am a believer that the situation is transitory because we have enough supply inside the system.
As for interest rates, the Bank of Canada is stepping out ahead of the rest of the central banks by saying that it plans to raise interest rates earlier than originally thought. I'm expecting to see something from the U.S. Federal Reserve about this as well.
Do you see rising interest rates as a negative for Canada in the medium term?
The purpose of tightening
[monetary] policy is not to
kill the economy. It's to
accommodate growth.
I don't see this as a negative. The purpose of tightening policy is not to kill the economy. It's to accommodate growth. So when we start to see a situation where we're overproducing and we see prices getting out of hand, the best thing for the economy is to achieve as much stability in an environment like that as is physically possible. Central banks know that when they actually take action, it takes between 12 and 18 months to have an effect on the real economy. If anybody has to be a good forecaster, it’s a central bank. They've got to see these things coming in; they've got to be able to take action well in advance of those events.
How would you summarize your economic outlook at this time?
Demand is strong and pent-up demand is a huge factor going forward. Stimulus is overpowering. Cash on hand is very strong. Inflation is perhaps a problem but also may be one of the greatest signs that we have a resilient world economy with lots of spare demand. All around, it's a very reassuring development.