Economic Outlook 2021: A Year of Catch-Up
Posted: Tue Dec 10, 2024 8:38 am
Canada's economic outlook for 2021 is similar to that expected for all developed countries: after the largest economic contraction since 1945 (which we estimate at 5.5% of GDP), the country should recover sufficient growth to largely offset the losses suffered in 2020.
Strong consumption and a recovery in exports will provide a boost to the Canadian economy. The acceleration of government investment projects should also provide a tailwind to Canadian economic growth.
Conversely, the postponement of business investment and a slowdown in the housing market will limit the extent of the recovery.
Strong consumption and a recovery in exports will provide a boost to the Canadian economy. […] Conversely, deferred business investment and a slowdown in the housing market will limit the extent of the recovery.
Recovery depends on virus evolution
Obviously, the strength of the economic recovery will depend above all on the evolution of the pandemic.
Recent medical developments are encouraging – widespread vaccine distribution starting in the summer of 2021 could allow the Canadian economy to grow by 4.5% or more. A later rollout could limit gains to 4%. In any case, recovery to pre-pandemic levels of economic activity will have to wait until 2022.
Beyond the virus, international uncertainty remains high, and protectionist trends continue to weigh on the outlook for an export-oriented economy like ours. The Bank of Canada will continue its exceptional monetary easing policy until at least 2023.
Consumption and exports: engines of growth in Canada
The Canadian government's aid programs have helped ensure that the job market recovery is much more vigorous than in the United States: as of October, 80% of the three million jobs lost in March and April had been recovered in Canada.
As in the United States, consumption and the housing market rebounded quickly following the easing of the spring lockdown. Exports of goods (including energy) recovered fairly quickly, while exports of services did not rebound at all.
For 2021, Canada should benefit from an environment favourable to its exports, and consumption should benefit from the resilience of the labour market and the continuation of household support programs.
Recovery limited by business investment
Our surveys of business owners, however, show that businesses will tend to postpone or cancel their investments, due to the need to clean up their finances.
Some service sectors – particularly those that rely on tourism, such as accommodation and food services – are in for a difficult second year. Their activities are expected to be limited by the pandemic in the first quarter, before seeing some recovery in the spring. The distribution of an effective vaccine will dictate their outlook for the end of the year.
The real estate sector, which has been spared from the crisis so far, is expected to stagnate at best. The significant decline in immigration in the short term, as well as mortgage lending conditions that could become more restrictive, represent downside risks in 2021, particularly in urban centers.
What impact on business owners?
Economic conditions continue to depend on the evolution of the pandemic: for sectors linked to tourism, a return to normal will not occur before 2022 at the earliest.
Buying local is gaining popularity and can represent a growth opportunity for SMEs. However, the protectionist trend that is gaining ground in many countries could pose a threat to export companies.
Investment in technology, remote working and online sales will remain important trends for the evolution and growth of Canadian SMEs in 2021.
Ontario expected to post strongest growth in 2021
Overall, economic growth is expected to be stronger in provinces that suffered more from the economic impacts of COVID -19 in 2020.
Ontario, which was the most severe province in lifting health restrictions in 2020, could experience the strongest economic growth in the country in 2021.
New investments in the auto manufacturing sector are expected to provide additional momentum to the province's manufacturing sector. A recovery in immigration is also expected to boost the economy, particularly in the Greater Toronto Area. Growth of 4.5 per cent is expected in Ontario.
Not far behind, British Columbia and Quebec are expected to post relatively high growth rates, around 4%. A less overheated housing market in British Columbia and a slowing aeronautics sector in Quebec will act as a headwind in these provinces.
On the Prairies side, Alberta experienced a double shock in 2020, namely the lockdown measures and the impact they had 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 natural resource base has been slightly less affected by COVID -19, can expect growth of 4 per cent. Manitoba, which posted the best performance of the group in 2020, will see economic growth slightly below the national average, at 3.5 per cent.
The situation in the Atlantic provinces will depend on how well the pandemic is controlled in Canada.
The creation of a bubble restricting travel within the four provinces limited tourism from outside the region during the 2020 summer season . However, it allowed the region to post the best health record in Canada. Maintaining restrictions next summer would limit the economic outlook in 2021 to a range of 2.0% to 2.5%. However, easing them could provide an additional boost of one percentage point.
Technology leading the pack
In 2020, strong growth in remote work, online learning, telemedicine, and e-commerce accelerated technology adoption across all sectors of the economy. As a result, technology sector output declined by only 3% between February and April 2020, compared with an 18% decline in the broader economy.
Nearly 40% of Canadian SMEs plan to invest in technology in 2021, which should benefit the technology sector. Overall, the sector is expected to grow by 1.1% in 2020 and 2.2% in 2021.
The crisis is more like a normal recession for most other sectors. Hard hit at the beginning of the crisis, the level of production is expected to gradually increase to catch up with pre-pandemic levels in 2022 .
The recovery in the tourism, accommodation and shareholder database catering sectors, however, 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.
3 key figures for the Canadian economy in 2021
4%
Canadian growth expected
5.2%
International economic growth expected
3% to 3.5%
Growth expected in the US
Limited outlook for Canadian oil
2020 was a challenging year for the Canadian oil sector. The historic reduction in oil demand forced many of the major producing companies to agree to significant production cuts.
Despite the discipline shown by OPEC+ members, oil inventories have reached record levels, exceeding three billion barrels.
Continued remote working and travel restrictions should dampen oil consumption, at least until a vaccine is widely deployed. Oil demand will recover somewhat, but it is unlikely to recover to pre-pandemic levels until the end of the year, at best.
The International Energy Agency still expects oil prices to be high enough to push Canadian production back to levels similar to those reached in 2019 – a 20% increase from the trough in spring 2020. However, that may not be enough to encourage new investment in the short term.
High inventories will limit crude price gains. Also, there is an additional risk from President-elect Joe Biden 's presumed opposition to the Keystone XL project, which would eventually carry oil from Alberta to Texas.
Political deadlocks in the United States?
After 11 years of uninterrupted growth, the US economy will have experienced a GDP contraction of around 3.5% in 2020. More than 20 million Americans lost their jobs between February and April.
The spring aid programs have nevertheless mitigated the negative effects of the first phase of the crisis. Consumer spending and the housing market in particular have experienced a V-shaped recovery.
Looking ahead, the pandemic remains less well controlled in the United States than in many countries, and concerns remain about the lack of coordination between public authorities.
The prospects of a split in power in Washington, where the Senate will likely be Republican (depending on the outcome of the Georgia runoff elections on January 5 ), suggest a political environment fraught with gridlock, at least until the 2022 midterm elections.
Meanwhile, consumer and business confidence remains stable despite the current uncertainty. Congress's failure to agree on a second round of household aid poses a significant risk to consumption.
Depending on how the pandemic evolves, our base case scenario is for economic growth of 3% to 3.5% in the United States in 2021 .
Global economy: time for protectionism?
The global economy will shrink by 4.4% in 2020, according to analysis by the International Monetary Fund (IMF). This is the first significant global contraction in more than 70 years.
In response, central banks around the world are employing the most expansionary monetary policies in their history. Absent a marked deterioration in the health situation, the IMF sees international economic growth of 5.2% in 2021.
The wind of protectionism observed in recent years is causing concern and could intensify, driven by political currents advocating industrial self-sufficiency.
Growth in international trade had already slowed considerably before the pandemic hit. The ongoing crisis has highlighted the vulnerability of some industries whose supply chains have become internationalized.
Moreover, it is not clear that the election of Joe Biden to the presidency of the United States will reverse the propensity to encourage Buy American, which is customary when the United States emerges from an economic crisis.
Strong consumption and a recovery in exports will provide a boost to the Canadian economy. The acceleration of government investment projects should also provide a tailwind to Canadian economic growth.
Conversely, the postponement of business investment and a slowdown in the housing market will limit the extent of the recovery.
Strong consumption and a recovery in exports will provide a boost to the Canadian economy. […] Conversely, deferred business investment and a slowdown in the housing market will limit the extent of the recovery.
Recovery depends on virus evolution
Obviously, the strength of the economic recovery will depend above all on the evolution of the pandemic.
Recent medical developments are encouraging – widespread vaccine distribution starting in the summer of 2021 could allow the Canadian economy to grow by 4.5% or more. A later rollout could limit gains to 4%. In any case, recovery to pre-pandemic levels of economic activity will have to wait until 2022.
Beyond the virus, international uncertainty remains high, and protectionist trends continue to weigh on the outlook for an export-oriented economy like ours. The Bank of Canada will continue its exceptional monetary easing policy until at least 2023.
Consumption and exports: engines of growth in Canada
The Canadian government's aid programs have helped ensure that the job market recovery is much more vigorous than in the United States: as of October, 80% of the three million jobs lost in March and April had been recovered in Canada.
As in the United States, consumption and the housing market rebounded quickly following the easing of the spring lockdown. Exports of goods (including energy) recovered fairly quickly, while exports of services did not rebound at all.
For 2021, Canada should benefit from an environment favourable to its exports, and consumption should benefit from the resilience of the labour market and the continuation of household support programs.
Recovery limited by business investment
Our surveys of business owners, however, show that businesses will tend to postpone or cancel their investments, due to the need to clean up their finances.
Some service sectors – particularly those that rely on tourism, such as accommodation and food services – are in for a difficult second year. Their activities are expected to be limited by the pandemic in the first quarter, before seeing some recovery in the spring. The distribution of an effective vaccine will dictate their outlook for the end of the year.
The real estate sector, which has been spared from the crisis so far, is expected to stagnate at best. The significant decline in immigration in the short term, as well as mortgage lending conditions that could become more restrictive, represent downside risks in 2021, particularly in urban centers.
What impact on business owners?
Economic conditions continue to depend on the evolution of the pandemic: for sectors linked to tourism, a return to normal will not occur before 2022 at the earliest.
Buying local is gaining popularity and can represent a growth opportunity for SMEs. However, the protectionist trend that is gaining ground in many countries could pose a threat to export companies.
Investment in technology, remote working and online sales will remain important trends for the evolution and growth of Canadian SMEs in 2021.
Ontario expected to post strongest growth in 2021
Overall, economic growth is expected to be stronger in provinces that suffered more from the economic impacts of COVID -19 in 2020.
Ontario, which was the most severe province in lifting health restrictions in 2020, could experience the strongest economic growth in the country in 2021.
New investments in the auto manufacturing sector are expected to provide additional momentum to the province's manufacturing sector. A recovery in immigration is also expected to boost the economy, particularly in the Greater Toronto Area. Growth of 4.5 per cent is expected in Ontario.
Not far behind, British Columbia and Quebec are expected to post relatively high growth rates, around 4%. A less overheated housing market in British Columbia and a slowing aeronautics sector in Quebec will act as a headwind in these provinces.
On the Prairies side, Alberta experienced a double shock in 2020, namely the lockdown measures and the impact they had 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 natural resource base has been slightly less affected by COVID -19, can expect growth of 4 per cent. Manitoba, which posted the best performance of the group in 2020, will see economic growth slightly below the national average, at 3.5 per cent.
The situation in the Atlantic provinces will depend on how well the pandemic is controlled in Canada.
The creation of a bubble restricting travel within the four provinces limited tourism from outside the region during the 2020 summer season . However, it allowed the region to post the best health record in Canada. Maintaining restrictions next summer would limit the economic outlook in 2021 to a range of 2.0% to 2.5%. However, easing them could provide an additional boost of one percentage point.
Technology leading the pack
In 2020, strong growth in remote work, online learning, telemedicine, and e-commerce accelerated technology adoption across all sectors of the economy. As a result, technology sector output declined by only 3% between February and April 2020, compared with an 18% decline in the broader economy.
Nearly 40% of Canadian SMEs plan to invest in technology in 2021, which should benefit the technology sector. Overall, the sector is expected to grow by 1.1% in 2020 and 2.2% in 2021.
The crisis is more like a normal recession for most other sectors. Hard hit at the beginning of the crisis, the level of production is expected to gradually increase to catch up with pre-pandemic levels in 2022 .
The recovery in the tourism, accommodation and shareholder database catering sectors, however, 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.
3 key figures for the Canadian economy in 2021
4%
Canadian growth expected
5.2%
International economic growth expected
3% to 3.5%
Growth expected in the US
Limited outlook for Canadian oil
2020 was a challenging year for the Canadian oil sector. The historic reduction in oil demand forced many of the major producing companies to agree to significant production cuts.
Despite the discipline shown by OPEC+ members, oil inventories have reached record levels, exceeding three billion barrels.
Continued remote working and travel restrictions should dampen oil consumption, at least until a vaccine is widely deployed. Oil demand will recover somewhat, but it is unlikely to recover to pre-pandemic levels until the end of the year, at best.
The International Energy Agency still expects oil prices to be high enough to push Canadian production back to levels similar to those reached in 2019 – a 20% increase from the trough in spring 2020. However, that may not be enough to encourage new investment in the short term.
High inventories will limit crude price gains. Also, there is an additional risk from President-elect Joe Biden 's presumed opposition to the Keystone XL project, which would eventually carry oil from Alberta to Texas.
Political deadlocks in the United States?
After 11 years of uninterrupted growth, the US economy will have experienced a GDP contraction of around 3.5% in 2020. More than 20 million Americans lost their jobs between February and April.
The spring aid programs have nevertheless mitigated the negative effects of the first phase of the crisis. Consumer spending and the housing market in particular have experienced a V-shaped recovery.
Looking ahead, the pandemic remains less well controlled in the United States than in many countries, and concerns remain about the lack of coordination between public authorities.
The prospects of a split in power in Washington, where the Senate will likely be Republican (depending on the outcome of the Georgia runoff elections on January 5 ), suggest a political environment fraught with gridlock, at least until the 2022 midterm elections.
Meanwhile, consumer and business confidence remains stable despite the current uncertainty. Congress's failure to agree on a second round of household aid poses a significant risk to consumption.
Depending on how the pandemic evolves, our base case scenario is for economic growth of 3% to 3.5% in the United States in 2021 .
Global economy: time for protectionism?
The global economy will shrink by 4.4% in 2020, according to analysis by the International Monetary Fund (IMF). This is the first significant global contraction in more than 70 years.
In response, central banks around the world are employing the most expansionary monetary policies in their history. Absent a marked deterioration in the health situation, the IMF sees international economic growth of 5.2% in 2021.
The wind of protectionism observed in recent years is causing concern and could intensify, driven by political currents advocating industrial self-sufficiency.
Growth in international trade had already slowed considerably before the pandemic hit. The ongoing crisis has highlighted the vulnerability of some industries whose supply chains have become internationalized.
Moreover, it is not clear that the election of Joe Biden to the presidency of the United States will reverse the propensity to encourage Buy American, which is customary when the United States emerges from an economic crisis.