2021 economic outlook: Playing catch-up

Canada’s 2021 economic outlook is similar to that of other developed countries: After the largest economic contraction since 1945 (a dip we estimate at 5.5% of GDP), the economy should grow sufficiently to largely offset the losses of 2020.

Strong consumption and a rebound in exports will give the Canadian economy a boost. Bringing forward government investment projects should also provide a tailwind to Canadian economic growth.

Conversely, the postponement of business investments and a slowdown in the housing market will limit the extent of the recovery.

Recovery depends on the course of the virus

There is no doubt that the strength of the economic recovery will depend above all on the evolution of the pandemic.

Recent medical developments are encouraging: Widespread distribution of a vaccine starting in the summer of 2021 could enable the Canadian economy to grow by 4.5% or more. A later deployment would limit gains to 4%. In any case, recovery to pre-pandemic activity levels will have to wait until 2022.

Beyond the virus, international uncertainty remains high, and protectionist trends continue to weigh on the prospects for an export-oriented economy such as ours. The Bank of Canada will continue its policy of extraordinary monetary stimulus until at least 2023.

Consumer spending and exports: Canada’s growth engines

The Canadian government’s relief programs have contributed to a much stronger labour market recovery than the situation in the United States: as of October, 80% of the 3 million jobs lost in March and April had been recouped in Canada.

As in the United States, consumption and the housing market bounced back quickly following the easing of the spring lockdown. Exports of goods (including energy) recovered fairly quickly, while service exports have not rebounded at all.

Looking ahead to 2021, Canada should see a favourable export environment, and consumption should be supported by a resilient labour market as well as continued household support programs.

Recovery limited by business investments

Our surveys of entrepreneurs show that businesses will likely postpone or cancel investments given the need to get their finances in order.

Some service sectors—particularly those dependent on tourism, such as accommodation and food services—will experience a second difficult year. The pandemic is expected to limit their activities during the first quarter before partially recovering as spring returns. The distribution of an effective vaccine will dictate their prospects for the end of the year.

The real estate sector—so far unfazed by the crisis—is expected to stagnate at best. The significant decline of immigration in the short term, as well as the possible increase of mortgage lending restrictions, represent downside risks, particularly in urban centres.

Ontario expected to post the best growth in 2021

In general, economic growth is expected to be higher in provinces that were hit hardest by the economic fallout of COVID-19 in 2020.

Ontario, which had the strictest health restrictions in 2020, could experience the country’s strongest economic growth in 2021.

New investment in the automotive manufacturing sector is expected to give an additional boost to the province’s manufacturing sector. A resurgence in immigration should also revitalize the economy, particularly in the Greater Toronto Area. Growth of 4.5% is expected in Ontario.

Not far behind, British Columbia and Quebec are expected to post high growth rates of around 4%. A less heated housing market in British Columbia and a slowdown in the aerospace sector in Quebec will be headwinds for these provinces.

In the Prairies, Alberta was hit doubly hard in 2020 by the lockdown and its impact on oil prices. The province will benefit from better control of the pandemic on both fronts. Growth is expected to be below average (3.5%), given the low level of investment expected in the oil sector.

Saskatchewan, whose resource mix was slightly less impacted by COVID-19, can expect growth of 4%. Manitoba, which posted the best performance in the group in 2020, will experience economic growth slightly below the national average of 3.5%.

The situation for the Atlantic provinces will depend on the control of the pandemic in Canada in general.

The creation of a bubble restricting travel within the four Atlantic provinces limited inbound tourism in the region during the 2020 summer season. However, it allowed the region to maintain the best health record in Canada. Continuing the situation next summer would limit the economic outlook for 2021 to a range of 2.0% to 2.5%. The easing of these restrictions could provide an additional boost of one percentage point.

Technology at the forefront

In 2020, strong growth in remote work, elearning, telemedicine and ecommerce accelerated the adoption of technologies in all sectors of the economy. As a result, output in the technology sector fell by only 3% between February and April 2020, compared with a decline of 18% in the economy as a whole.

Nearly 40% of Canadian SMEs plan to invest in technology in 2021, which should benefit the sector. Overall, the technology sector is projected to grow by 1.1% in 2020 and then by 2.2% in 2021.

For most other sectors, the crisis looks more like a normal recession. Hard-hit at the beginning of the crisis, production levels are expected to gradually ramp up to pre-pandemic levels by 2022.

However, recovery in the tourism, accommodation and food service sectors is likely to be slower. These hard-hit sectors will likely have to wait until the pandemic is almost completely under control before their activity levels return to normal.

Three key stats for the Canadian economy in 2021

Limited outlook for Canadian oil

This has been a challenging year for the Canadian oil sector. The historic reduction in oil demand has forced many major producers to agree to significant production cuts.

Despite discipline on the part of OPEC+ members, oil stocks reached record highs, exceeding three billion barrels.

Continued remote work and travel restrictions are expected to temper oil consumption, at least until a vaccine becomes widely available. Oil demand will recover, but is not expected to return to prepandemic levels until the end of the year at best.

Nevertheless, the International Energy Agency expects oil prices to be high enough to return Canadian production to near 2019 levels—a 20% increase from the low point in spring 2020. However, this may not be enough to encourage new investment in the short term.

High inventories will limit crude oil price increases. There is also an additional risk from President-elect Joe Biden’s alleged opposition to the Keystone XL project, which would bring oil from Alberta to Texas once completed.

Political deadlock in the United States?

After 11 years of uninterrupted growth, the US economy will have experienced a GDP contraction of about 3.5% in 2020. More than 20 million Americans lost their jobs between February and April.

However, aid programs in the spring have offset the negative effects of the first phase of the crisis. In particular, consumer spending and the housing market experienced a V-shaped recovery.

Moving forward, the pandemic is not as well controlled as it is in many other countries, and there are still concerns about the lack of coordination between public authorities.

The prospect of a division of power in Washington, where the Senate is likely to be Republican (depending on the outcome of Georgia’s runoff elections on January 5), suggests a political deadlock, at least until the midterm elections in 2022.

In the meantime, consumer and business confidence remains stable despite the current uncertainty. The inability of Congress to agree on a second round of stimulus cheques for households represents a considerable risk to consumption.

Depending on the evolution of the pandemic, our baseline scenario sees economic growth of 3% to 3.5% in 2021 in the United States.

Global economy: Time for protectionism?

The global economy will contract by 4.4% in 2020, according to International Monetary Fund (IMF) projections. This would be the first significant global contraction in over 70 years.

In response, central banks around the world are using the most expansionary monetary policies in their history. Assuming there is no pronounced deterioration in the pandemic situation, the IMF has projected international economic growth of 5.2% in 2021.

The protectionist wind seen in recent years is causing uncertainty and could blow stronger, driven by political currents advocating industrial self-sufficiency.

The growth of international trade had already slowed significantly before the pandemic. The ongoing crisis has highlighted the vulnerability of certain industries with globalized supply chains.

Moreover, it is not clear that the election of Joe Biden as President of the United States will reverse the propensity to encourage Buy American, which often shows up when the United States emerges from an economic crisis.

Growth depends on managing the pandemic

In conclusion, the growth of the Canadian economy will depend first and foremost on managing the pandemic.

If mass distribution of a vaccine begins mid-year, we could see economic growth of 4.5% or more and a return to our precrisis GDP fairly early in 2022.

If a vaccine is not distributed until late 2021, growth would be limited to about 4%, and full recovery of the Canadian economy would then be delayed until late 2022.

In the meantime, low interest rates, a stable loonie and a more predictable geopolitical environment will limit the downside risks facing Canadian entrepreneurs.