The Canadian Economy: After a strong rebound, the recovery will slow down during the winter

As elsewhere, the Covid-19 pandemic has led to a dramatic down and up of the Canadian economy. As expected, GDP rebounded in the third quarter of 2020 at a rate of 8.9 percent. The recovery was broad-based and supported by fiscal policy measures to households and businesses. Private consumption increased by 13 percent and business investment even grew at a rate of 16.2 percent. In particular, demand for durable goods such as cars increased at record rates. In addition, residential investment saw a large increase. Imports grew faster than exports which reflects the fact domestic consumption and investment strongly rebounded. This development followed the dramatic decrease of GDP in the second quarter of 2020 (minus 11.3 percent). In the first quarter of 2020, the Canadian economy had already dropped at a rate of 1.9 percent. Thus, economic output was still 5.25 percent below the level observed for the fourth quarter of 2019.

Both household consumption (minus 13.6 percent) and business investment (minus 15.9 percent) considerably decreased in the second quarter. Export volumes decreased by 18.9 percent and import volumes declined 23.1 percent. In the summer, I was relatively optimistic as regards the short-term recovery, but relatively pessimistic as to economic developments next year (I also hold this view for several other countries).

The pandemic is obviously still a drag on the economy, although the situation is currently less severe than in many other advanced economies. I expect that economic growth in the fourth quarter will be modest. The situation on the labor market has improved since May, but remains bad. The unemployment rate in November was at 8.5 percent (compared to 5.6 percent in February before the lockdown).

For the whole year of 2020, I think that there will be a severe contraction of the economy of 5 to 6 percent. This will be followed by a rebound of 4 to 5 percent in 2021. The increasing availability of vaccines against COVID-19 will certainly help the recovery. In a more dramatic scenario (depending in particular on how fast the pandemic and the measures to contain it will fade away), the recovery in 2021 would be more modest at perhaps 3 to 4 percent. During 2020, fiscal and monetary policy measures particularly support the economy. The government adopted measures such as income backstops for households and loan guarantee programs. The Bank of Canada reduced its interest rate and adopted asset purchasing programs. Inflation should not be expected to significantly increase in the near future. However, one should bear in mind that inflation could potentially rise above levels seen before the pandemic in 2022. Obviously, forecasts are associated with a high degree of uncertainty at the moment.

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