Nine months into the pandemic, the short-term economic outlook for Canada entering 2021 is strikingly different than one year ago. Yet structural trends—such as the digital transformation of the economy—remain and in some cases have been accelerated.
Canada, its governments and its businesses, have to address the impacts of the COVID-19 crisis while developing strategies and building momentum for longer-term prosperity, all against the backdrop of a challenging global geo-political environment.
The Outlook sets a context for businesses to plan by reviewing economic scenarios for the next two years and analyzing global and domestic policy factors that could shape the business environment in the years ahead.
The Legacy of 2020: A Catalyst for the Transformation of the Economy
The year 2020 was a watershed: the most severe pandemic since 1918, and the worst economic crisis since the Great Depression. The starting point for planning for 2021 and beyond is thus strikingly different from one year ago. A new U.S. administration is an added factor of change.
Importantly, developments in 2020 have accelerated or exacerbated trends already taking place pre-pandemic, including the shift of economic weight to Asia, the digital transformation of the economy, and the rising attention worldwide to climate change.
Looking to 2021 and beyond, businesses have no choice but to re-think impacts for their markets, their workers, their supply chains, their communities. They must set new directions and in many cases embark on transformative initiatives—a strategic reboot.
For their part, while continuing to aid workers and firms through the crisis, governments must establish a climate that will encourage investment and contribute to improving the productivity of the economy.
This should include credible fiscal anchors, and shifting fiscal action from supporting consumption to investing in capacity.
Strengthening our ability to trade, improving the skills of our workforce, investing in productive infrastructure, streamlining regulation, and accelerating digital transformation require priority attention. A key goal is helping our firms grow their market share, particularly in the world’s fastest-growing economies.
The strategic reboot of firms, governments and the economy will require strong leadership and collaboration between the public and private sectors. It must begin while we still find our way out of the crisis.
The Global and Canadian Economies—Recent Developments and Projections to 2022
The outlook for the global economy remains highly uncertain. Developments over the next two years will depend critically not only on the availability of vaccines for COVID-19, but on the timeliness of their distribution, their effectiveness in the field, the response of individuals and businesses, and the ability and willingness of governments to continue to provide fiscal support.
Businesses and governments nonetheless need assumptions and scenarios to plan.
Under a baseline scenario for the global economy:
- after a precipitous drop in output in 2020, advanced economies grow modestly in the first quarter of 2021, shift into higher gear until mid-2022, and then slow down on the way to what are now reduced rates of potential growth;
- for example, after a drop of output of 3.6% in 2020, the U.S. economy grows by 3.6% in 2021, and 3.3% in 2022;
- China ends the year 2020 with a gain of output of 2% and then takes off again to grow at rates of 8.1% in 2021, and 5.6% in 2022—by the end of 2022, it will have grown by 16% relative to the end of 2019, compared with less than 2% for advanced economies;
- there is wide variation in other emerging economies and many risks and uncertainties ahead—for example, output in India will contract by about 10% in 2020, and the road to recovery is uneasy.
For Canada, under this baseline scenario:
- output in the fourth quarter of 2020 will be 4.9% below a year earlier; it will grow by about 3.9% during 2021 and 2.7% during 2022;
- employment will tend to recover in step with output, but it will also be affected by the sectoral composition of growth, and by changes in productivity.
The pandemic will have lasting impacts on the economy. It is not merely lowering potential output. It is bringing about and accelerating structural change that will entail both a reallocation of capital and labour across industries, and a change in the mix of capital and labour skills within industries.
Monetary and fiscal stimulus are appropriate in the current circumstances. It will also be important coming out of the pandemic for policy to facilitate adjustment to the structural change.
Anchoring Fiscal Policy in Canada: The “10% Rule”
If well invested, government borrowing to support the recovery from the COVID crisis should raise potential growth and help prevent a more permanent scarring of the economy.
However, to avoid an excessive build up of debt and future public debt charges, a federal fiscal plan for the recovery should be anchored in two goals:
- achieving a primary deficit of 1% of GDP by 2024-25; and
- containing future primary deficits to levels that keep public debt charges no greater than 10% of current revenues—what we call the “10% rule”.
Under our baseline economic scenario, the fiscal track set out by the government in the Fall Economic Statement could meet the two goals by 2024-25.
Over the longer term, given the build up of debt to 2025, our simulations show that it will be considerably more difficult to meet the 10% rule and to ensure fiscal sustainability.
If interest rates average one percentage point below nominal GDP growth, just maintaining real program spending per capita at close to 2018 levels without raising new tax revenue will only be possible if we achieve productivity growth much higher than so far this century.
If interest rates are equivalent to nominal GDP growth, a less favorable but possible scenario, the 10% rule is not met in the longer term without raising taxes or reducing real per capita program spending.
The bottom line: the federal debt burden will be very difficult to manage over the longer term, drawing into question the capacity to fund large new programs or transfers to provinces without raising taxes.
Global Challenges Requiring Adept Diplomacy and Coalition Building
The geo-political outlook for 2021 draws out severe global and regional challenges—like the pandemic and climate—but also some indication that diplomacy and coalitions of interests may foster new approaches that support progress.
A U.S. administration more committed to multilateralism may be more effective in managing the relationship with China that has largely overcome the effects of COVID, resumed its fast economic rise, and continued to flex its muscles internationally.
In this evolving environment, Canada has an opportunity to solidify its relationship with the United States, contribute ideas, and advance its own interests.
The Transition to a Biden Administration and Trade Policy Priorities for Canada
The coming into office of the Biden administration will set a new tone, and instill a new dynamic, in global trade relationships.
For Canada, it is an opportunity to leverage our economic relationship with the United States and to pursue global trade rules, agreements, and business practises supportive of selling more goods and services to the world.
Specifically, Canadian priorities include:
- using the election of Joe Biden to secure the benefits of the CUSMA and to work collaboratively on global trade reform;
- stepping up efforts, in concert with United States and other allies, to strengthen the WTO;
- pursuing improved rules for digital trade, trade-distorting subsidies, and competition;
- diversifying our trade into dynamic Asia and Europe; and
- pursuing a long-term strategy with China, including both enhanced trade disciplines and co-operation on matters of shared interest.
Managing the Disruption and Preparing for the Future of Work
The impacts of the COVID crisis for Canadian workers has been severe. The unemployment rate, down from a peak of 13.7% in May 2020, is still 8.5%, with low-wage workers most seriously affected.
Although approximately 80% of jobs have been recovered as of November, it will still take until 2022 for employment to return to pre-pandemic levels. Some jobs, in fact, will not return.
There have been hits and misses in the suite of programs introduced in Canada since the onset of the pandemic to bridge workers and employers to the other side of the crisis.
As our economy mends and as emergency programs are pulled back, workers, employers and governments must use the time to get ready for the labour market of the future as shaped by technology and other structural factors.
Some policy preoccupations that dominated pre-crisis like income inequality, the protection of workers in the gig economy, and the diversity of the workforce, will again be salient.
Drawing lessons from the crisis, an independent review of the income safety net could be commissioned to deliver recommendations by mid-2022.
Critically, employers and governments have to collaborate to address the mismatch of skills that may impede the recovery, and to invest in a workforce that may be able to take advantage of the opportunities created by new technology as it permeates all sectors of the economy.
The ultimate goal must be a more inclusive, productive, and resilient labour force.
The Necessary Contribution to Productivity Growth
A shift from consumption to investment, together with strategic focus, and competent design and delivery, are necessary conditions for government policy to make a stronger contribution to productivity growth.
There are opportunities to pursue improved policy outcomes, in particular, through:
- a strategic, long-term approach to infrastructure, with strong private sector participation;
- a regulatory system that is streamlined and that is more supportive of innovation and competitiveness;
- a digital transformation of government, for example a digital I.D., that could serve the wider economy and, with strong public and private sector leadership, create competitive advantage for Canada.