The Canadian economy is poised for a sharp rebound this year and next after a year of pandemic restrictions, but a “red hot” housing market fuelled in part by government-funded household savings could still hamper growth, a new report says. The Conference Board Of Canada expects the Canadian economy to grow 5.8% in 2021, the highest since 2007. Growth in 2022 is expected to average 4%, double the roughly 1.8% average economists predicted before the pandemic.

The report, entitled “Hope At Last,” echoes other economic outlooks that see the Canadian economy roaring back to life once restrictions are lifted, reversing one of the deepest periods of retrenchment in recent memory. The comeback will be fed in part by the immense household savings Canadians accumulated last year, with the savings rate surging from 1.4% prior to the pandemic to 14.8% in 2020.

But the Conference Board also warns that a big chunk of savings has been funnelled into an increasingly overcrowded housing market. “Some of the recent increase in household incomes has ended up in the housing sector,” the report said. “Canadian resale markets are red hot, fuelled by low interest rates and a desire for more living space.” It said there are “signs that markets could be overheating,” and warned that the “collapse of such a bubble would have wide-ranging, negative effects on the economy.”

Liberal ministers including Finance Minister Chrystia Freeland have been boasting about their contribution to sky-high household savings levels, saying they would act as “pre-loaded stimulus” once shutdowns are reversed. The Trudeau government has faced criticism for what some characterize as an overzealous response to the pandemic — most notably in its $2,000 per month Canada Emergency Response Benefit (CERB) and Canada Recovery Benefit (CRB) — that has in turn fed into high household savings.

Robert Kavcic, senior economist at Bank of Montreal, also warned on March 30 about the pace of growth in Canada’s real estate markets, saying Ottawa should intervene in order to cool things down. “We believe policymakers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road. As it stands now, prices are going parabolic across a number of markets and the price strength appears to be feeding on itself.”

Housing markets in Canada continued to grow last year, and are expected to pick up pace as demand remains high. Kavcic called for policies that would break the “market psychologies” that say prices will rise forever, and which tend to bring about severe corrections.

“Despite the devastating impacts of the pandemic, residential construction activity increased last year, and additional gains are anticipated in 2021 as well,” the Conference Board said. Meanwhile, investment in commercial real estate is expected to taper off, largely due a wider acceptance of work from home practices and uncertainties about when workers might begin to return to the office on a regular basis.

Still, pent up consumer demand and higher oil prices are likely to keep the economy buoyant for two years at least, the report said. “With consumer demand for tourism and recreational services having been suppressed for more than a year, we expect to see a strong rebound in spending on services once restrictions are lifted,” it said.

The Conference Board expects oil prices to average US$68 per barrel in 2021 and US$71 per barrel in 2022, partly filling a gap that has persisted since mid-2015 when oil markets collapsed. Economists at the Conference Board do warn about a lack of pipeline capacity, and point out that “growing opposition to the Enbridge Line 3 pipeline is a downside risk to the sector’s investment outlook.”

The US$1.9-trillion stimulus package recently passed in U.S. Congress, the American economy will see “a sharp rebound in economic activity south of the border,” the report, said, which will feed into Canadian exports. But exports will continue to lag behind past years in Canada as dependency on foreign imports continues to grow. “Although Canada’s export sector will get a solid boost from a fuelled-up U.S. economy over the next two years, Canada’s trade sector will be a neutral force this year, with exports expanding at nearly the same pace as imports.”

Source: National Post