The BDC Economic Outlook – Ten Trends to Keep your Eye on in 2021

Canada’s latest economic data paints a picture of a robust economic recovery that is slowing under the weight of a second wave of COVID-19 infections. In their December 2020 report, BDC, a crown corporation feels 2021 looks promising, despite significant remaining challenges. Here are 10 trends the BDC says to keep your eye on for Canada

Ten Trends to Keep your Eye on in 2021

1. The Uncertainty with the Second Wave: In the coming months, the trajectory of the economy will depend primarily on how the pandemic evolves. Although the number of new cases of COVID-19 infections is lower in Canada than elsewhere in the world (graph), several provinces are implementing new measures to limit the spread of the virus. In general, the stricter the rules, the more the economy will be affected. We don’t expect a significant improvement in the pandemic before spring.

2. The Vaccine is Coming: The arrival of a vaccine appears to be near. Several pharmaceutical companies report efficacy rates of more than 90%—a remarkable breakthrough in such a short time. Pending approval of vaccines by health authorities, many questions remain about the logistics of global distribution.

Canada has ordered enough doses to theoretically achieve herd immunity. However, bottlenecks could initially force priority vaccination for certain groups. This would result, for a period of time, in continued health measures and restrictions that should, however, be less severe than at present.

3. The Economy will grow after the 2020 contraction: A projected economic contraction of 5.5% in 2020 will be followed in 2021 by Canadian GDP growth of 4% to 4.5%, depending on vaccine availability. A slowdown in the Canadian economy, observed in the last quarter of 2020, is expected to continue into the first part of the new year.

4. The Winners and Losers in 2020: A few sectors did well in 2020, including retail and real estate. Continued government income support for households affected by the pandemic should support consumption. A significant decline in immigration in 2020, combined with tighter mortgage lending conditions, could limit the potential of the real estate sector, particularly in urban centres.

5. Business Investment will be Fragile: Investment will remain low, while entrepreneurs prioritize the improvement of their financial situation. Nevertheless, our research suggests they intend to invest more in technology, particularly to improve their ability to sell online and support remote work.

6. Who will have a L-Recovery: For the sectors most affected by the pandemic, such as accommodation , transportation and food services, the recovery will unfortunately be muted in 2021. Although a vaccine will soon be available, health measures will likely be maintained until herd immunity is reached. It will also take a few years for international tourism to make a full recovery.

7. Where does your company fit in the Recovery? Forget about U, V, W or L scenarios to illustrate the economic recovery. It is increasingly clear the current recovery is K-shaped: A rapid recovery for some sectors (V), while others continue to suffer the effects of the pandemic (L). Women, youth and immigrants have benefitted less than average from the economic recovery that began in May, according to employment statistics.

8. Is Canada still a Fossil Fuel Economy: The health situation will limit the recovery in oil demand for at least the first half of 2021. High inventories limit prospects for price increases. Maintaining current prices will therefore depend on continued OPEC+ cooperation. The new U.S. administration’s opposition to the Keystone XL pipeline also represents a risk for Canadian producers.

9. The Canadian $ is holding its own: The Canadian dollar, which has strengthened since the beginning of the recovery, is expected to remain in a range of US$0.75 to US$0.78 in the absence of significant jolts to the oil market. The anticipated convergence of Canadian and U.S. monetary policies until 2023 should limit the loonie’s volatility against the U.S. dollar.

10. Who will survive the Pandemic? Business survival rates will need to be closely monitored. BDC surveys indicate that 87% of Canadian entrepreneurs expect to still be in business a year from now. However, a significant number of businesses remain inactive, and the longer they are shut, the greater their chances of not rebounding.

In August, there were 9% fewer active companies than the average in 2019. The situation has probably deteriorated since then, given the tightening of health measures in several provinces. In response, the federal government is maintaining its assistance programs for businesses. The more businesses that close their doors, the more difficult the economic recovery will be.

Canadian Economy Snapshot

The Canadian economy experienced the fastest growth in its history in the third quarter (July to September). GDP expanded by 40.5% on an annualized basis, according to Statistics Canada. The increase was a rebound from the worst quarter ever recorded (-38.1% annualized).

Despite the strong recovery, third-quarter GDP was still 5.3% below the last quarter of 2019. While the overall economy has lost ground because of the pandemic, there were some bright spots.

Among these was a 4.8% increase in goods consumption, even though household spending dropped 5%. Spending on services—which has been harder hit by the pandemic—was down 12.4% compared to Q4 2019.

Another surprisingly positive area has been real estate investment. It was 10.3% higher than in the fourth quarter of 2019.

On the other hand, business investment was down (-13.5%) from pre-crisis levels. Exports were also 8.7% lower compared to Q4 2019. The latter decline is mainly due to difficulties related to services exports, which dropped by 21.5%. Exports of goods were down 5.5% during the same period.

The momentum of the last few months is probably coming to an end. The tightening of lockdowns across the country is certain to affect the performance of several industries. Preliminary data suggest GDP growth of just 0.2% in October, the weakest since the start of the recovery. This level of growth would bring economic activity to 4% below its previous peak.

Future gains in GDP will be more difficult to achieve. It will probably take until 2022 to return to previous peaks. Our baseline scenario assumes a recovery period of about 27 months. A rapid roll-out of an effective vaccine could subtract a few months from this forecast.

Canadians continued to benefit from government assistance programs during the third quarter. Disposable income, which declined slightly compared to the second quarter, was still 8% higher than before the crisis.

Government transfers to households are 41% higher than at the beginning of the year, while employee compensation, thanks to a jobs recovery in recent months, is only 1% behind.

As a result, retail sales are breaking records and the savings rate of Canadians remains high, reaching 14.6% in the third quarter. This bodes well for consumption in the coming months, despite the pandemic.

However, these developments are offset by historic government deficits. The federal deficit is projected to reach $381.6 billion in fiscal 2020-2021 (17.5% of GDP), the government reported in its fall update on November 30. The deficit could even reach $400 billion if the second wave was to worsen economic conditions.

This historic deficit would be followed by at least five more years of deficits, including next year’s projected shortfall of $121.2 billion. The economic statement also set the table for stimulus spending that could reach $100 billion over the next three years. The federal debt will exceed 50% of GDP for the first time since the late 1990s.

The Job Market19% of jobs still to be recovered

There was further evidence of slower growth in the latest job numbers. In November, 62,100 net jobs were created in Canada, bringing the total to 2.4 million since May. This corresponds to 81% of the 3 million jobs lost at the beginning of the crisis, which compares favorably to the 56% of jobs recovered in the United States. The Canadian unemployment rate has gone from 8.9% to 8.5%.

As for GDP, the second wave of infections and resulting partial lockdowns are likely to limit job creation in the coming months, as evidenced by the loss of 23,800 jobs in the accommodation and food services sector.

To date, the level of hours worked in this sector is only 74% of last February. We will probably have to wait until spring before seeing significant job creation here.

The Hope of a Vaccine to solve the Problem

After record growth in the third quarter, the table is set for a slow year-end. The situation will continue to improve, but at a much slower pace, particularly during the winter months.

The next phase of recovery will require mass immunity, which implies an effective roll-out of vaccines. Until then, retail sales and exports will see limited gains.