This article originally appeared in LesAffaires.com in October 2021.
SVP & Chief Economist, Scotiabank
The Canadian economy is still in the early phases of what we expect to be a protracted economy recovery and Québec is leading the pack so far. A key determinant of this rebound in the near-term is the economic impact of re-openings. Provinces that managed COVID well and were able to re-open their economies before others were able to benefit from the rebound earlier than others. These re-openings have led to a surge of activity in the sectors most negatively impacted by COVID, such as the food and accommodation sector. Québec is a clear example of the momentum that re-openings can unleash. The province is posting remarkably strong growth numbers so far this year and as a result will be the most rapidly growing province this year by a large margin.
There is much more to the expansion than a rebound from COVID. There is plenty of evidence that demand is strong. Savings are very high; household wealth is at record levels, business confidence is near historical peaks, commodity prices well above long-run averages, job growth has been very strong, growth in our principal trading partner, the United States, is exceptionally robust, and monetary and fiscal policy remain very, very stimulative. These fundamental drivers of demand are so powerful that the fourth wave of the pandemic is proving to be a mere distraction from an economic perspective even though there are considerable and horrible impacts on health and the health system.
In the near-term, the greatest challenge to the outlook lies in the strength of demand relative to supply. There are temporary supply bottlenecks in all major economies reflecting a widespread lack of capacity. This is observed in everything from shipping, to commodities, to labour. The immediate consequence of this is to raise inflation, but another consequence is to act as a brake on growth. In fact, we have revised down our forecast for Canada about a month ago for this very reason. The implication of these supply challenges are straightforward: there is an accumulation of pent-up demand as firms and households are unable to purchase certain goods; production plans are being recalibrated in some sectors, there is a shortage of certain goods for sale, and firms are considering increasing prices to reflect these challenges. Moreover, from a labour market perspective, though we remain in the early phases of the recovery, labour shortages are at historical highs. In Québec alone, there are already over 220k job vacancies. That’s nearly 100k more than pre-pandemic. The upshot of this is that competition for talent will increase, complicating hiring and retention, and putting upward pressure on wages.
What’s occurring at a national and international level is also playing out in Québec with some nuances. The province benefitted from an earlier re-opening, giving it a head start on the recovery. That head start, however, also means that the economy will be less turbo-charged in the second half of the year. We observe, for example, that job growth has slowed relative to Ontario since they re-opened. The same is observed in Statistics Canada’s Real Time Local Business Conditions Index, which shows that economic activity in Montreal has slowed relative to other major cities once restrictions were loosened elsewhere. Somewhat surprisingly, despite nation-leading growth so far this year, optimism on the part of small and medium-sized enterprises seems to lag that of other provinces. This is to some extent always the case in Québec, but it does stand in sharp contrast to the economic results so far this year.
The case for more optimism on the part of firms is very strong. The fundamentals noted above will continue to have a powerful impact on growth, even though it will be challenging for firms to maximize opportunities given the range of temporary supply challenges. The payoffs of capitalizing on the current environment will be substantial: If our forecast through 2023 is accurate, Québec will register the strongest growth in its history over a three-year period of time with the exception of the 1998-2000 period.