The Canadian Economy: Solid economic recovery

As in many other countries, the Covid-19 pandemic has led to a dramatic down and up of the Canadian economy. As expected, gross domestic product continued its rebound in the fourth quarter of 2020 with a growth rate of 2.3 percent. In the third quarter, the economy expanded at a rate of 8.9 percent after a dramatic decrease of 11.4 percent in the second quarter. Household consumption stagnated in the fourth quarter, mainly because the pandemic and the measures to contain it were obviously still a drag on the economy and in particular consumption. Residential investment increased because of favorable mortgage rates and the shift of work from home. Corporate investments in equipment increased at solid rates, while investment in non-residential buildings decreased – probably because of less demand for office space. Overall, the Canadian economy experience a sharp recession in 2020. Output was 5.4 percent lower than in 2019.

The situation on the labor market has improved since May, but remains bad. The unemployment rate in February was at 8.2 percent (compared to 5.6 percent in February before the lockdown). The pandemic and the measures to contain it continue to be a serious drag on the economy, although the on-going vaccination program should gradually help re-open the economy. For the first quarter of 2021, I only expect a modest growth rate for the economy. The recovery will probably continue at a faster pace in the second and third quarters. The measures to contain the pandemic will probably become less tight. In particular, private consumption can be expected to recover at a considerable pace. Household savings rates were on average high in 2020 and it can be expected that these savings will help boost private consumption this year. Domestic fiscal and monetary policies support the recovery. 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 will moderately increase but I currently do not expect massive increases in prices. Obviously, however, the risk for high inflation is more pronounced than in past years. In addition, the massive fiscal stimulus measures in the United States (around 13 percent of U.S. GDP) will also spill over to Canada. I expect that they will lift economic output in 2021 by at least 0.5 percentage points.

All in all, I currently expect the Canadian economy to expand by 5.5 percent in the current year. In 2022, the growth rate is likely to be more moderate at around 3.5 percent.

Processing…
Success! You're on the list.

Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time: 

Processing…
Success! You're on the list.
%d bloggers like this: