• An explosion of COVID cases is leading to a sharp reduction to forecasted GDP growth for 21Q1 in Canada, but very solid growth is expected as restrictions on activity are lifted by the end of the first quarter. We expect growth of 4.3% in 2021 and 2022.

  • The near-term outlook in the US is more positive than it is in Canada, as fewer COVID restrictions are implemented south of the border so far despite an increased prevalence of the virus. For the remainder of the year, a ramping-up of fiscal support under President Biden is expected to lift US growth to roughly 5% in 2021, falling to 3.7% in 2022.

  • Excess slack will persist, with unemployment rates coming down only gradually and remaining well above pre-COVID levels for much of the next two years even as the output gap will close mid-2022. Policy rates in Canada and the US will remain at current levels for the foreseeable future, but there is a risk that both central banks raise rates well before their currently communicated horizon. We will update our rates call once we have more clarity on the post-COVID recovery.

The COVID storm is raging. The number of infected is climbing exponentially in many countries and provinces. Despite the vaccine roll-out, and possibly because of it, measures to slow the spread of the virus appear, thus far, to be having a limited impact on virus containment. Virus fatigue, the holiday period, the heads-up given that more restrictive measures would be forthcoming, and the evolution of much more contagious strains of COVID have all contributed to the worrisome acceleration in cases and hospitalizations seen so far this year.

This nasty storm should pass. Owing to the vaccine roll-out, the uncertainty at this point is now focused on the duration of the storm rather than whether or not it will pass, as was the case when the pandemic first struck last year and severe restrictions on social engagement were put in place. For the purposes of our forecast, we assume the bulk of Canadian restrictions remain in place until the end of March.

A strong rebound is expected after that. Part of that will reflect the re-opening of the economy in Q2, but we expect a powerful recovery to take us through at least the end of 2022. In Canada, that is driven by a number of factors:

  • Considerable pent-up demand for a range of goods and services that could be financed by elevated cash balances. As households become less worried about the impact of the virus on their finances, we anticipate some of these cash balances will be drawn down.
  • Strong underlying momentum in a number of industries prior to lockdowns. Monthly GDP for October and Statistics Canada’s estimate for November suggested much stronger-than-anticipated economic activity at a time when some virus control measures were being strengthened. The momentum at the end of 2020 is raising 2021 growth in this forecast, but it is important to remember that a number of industries and their workers continue to struggle. The K-shaped recovery is still very much in play.
  • Substantial wealth effects. Equity markets have responded very positively to the vaccine, the US election, and the associated optimism with respect to economic prospects in 2021 and beyond. A similar dynamic has impacted commodity prices, which have rebounded very sharply in anticipation of a post-COVID economic rebound. Rising house prices are also adding to this wealth effect. We view the housing market as quite undersupplied and therefore believe prices are likely to rise further.
  • Immigration should pick up sharply at some point this year, and government targets suggest strong increases will be observed until at least 2023.
  • Fiscal support will be ramped-up in Canada by $20–30 billion in the next budget. The exact impact of that support will be assessed as details are announced. In the US, it is clear that the Biden administration will undertake substantially more fiscal support this year and beyond. For the time being, we are reflecting earlier announced fiscal measures in addition to US$2,000 stimulus cheques. More is likely to be done.
  • Monetary conditions will remain highly supportive of the recovery given central bank pledges to maintain policy unchanged for an extended period of time. The recent rise in long-term interest rates is consistent with the improved outlook and so should not be viewed as a brake on growth. Likewise with the appreciation of the Canadian dollar, which reflects a more benign global risk environment and stronger commodity prices. At current levels, we do not view the loonie as a headwind to growth and the recovery.

Taken with the current state of COVID dynamics, these fundamentals suggest growth of around 4.3% this year in Canada, followed by roughly the same progression in 2022. We expect, however, that GDP will fall by around 2% in the first quarter of 2021 before activity rebounds in the second quarter. Of course, the path will be a function of success, or lack thereof, in controlling the virus over the next several weeks. A re-opening of the economy in early March instead of at the end of the month would lead to less loss of output in Q1, while imparting stronger momentum in Q2.

Growth forecasts in Canada stand in sharp contrast to those in the US in the early part of the year. While COVID is more prevalent in the US, restrictions on movements are far less stringent than they are in Canada. As a consequence, the mobility of US residents has remained quite resilient to COVID in the last few weeks. This is not the case in Canada, as can be seen in chart 1. As a result, we expect modest GDP growth in the US in the first quarter, while we expect a fall in economic activity in Canada. The counter to this, obviously, is much worse health outcomes in the US even if vaccine rollout is more rapid south of the border.


For the year as a whole, less COVID-related economic disruptions, combined with a much more substantial increase in fiscal support and more sensitivity to equity market wealth effects in the US in 2021 should lead growth there to be around 5%, more than half a percentage more than the 4.3% expected in Canada. That growth advantage should wane in 2022, with Canada’s 4.3% growth surpassing the 3.7% anticipated in the US.

Risks to the outlook of course remain important. On the downside, slow vaccine rollouts and acceptance can delay the anticipated rebound, as would further evolution of the virus. More positively, it may be that individuals adapt to the current restrictions and resume spending more rapidly than we currently assume. Fiscal policy may also be more supportive than expected. Given the nature of the jobs being affected now and the CERB-like benefits available through the Employment Insurance system, household income might once again benefit as lockdowns are imposed. It is also possible that more fiscal firepower is deployed in Canada in the context of the Spring budget, above the $20–30 billion already planned. This is also possible in the US, where we have only penciled in larger stimulus cheques and not a range of other measures the Biden Administration is likely to pursue.





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