Canada’s 2021 economic outlook is similar to that of other developed countries: After the largest economic contraction since 1945 (a dip we estimate at 5.5% of GDP), the economy should grow sufficiently to largely offset the losses of 2020. Strong consumption and a rebound in exports will give the Canadian economy a boost. Bringing forward government investment projects should also provide a tailwind to Canadian economic growth. Conversely, the postponement of business investments and a slowdown in the housing market will limit the extent of the recovery.

Recovery depends on the course of the virus

There is no doubt that the strength of the economic recovery will depend above all on the evolution of the pandemic. Recent medical developments are encouraging: Widespread distribution of a vaccine starting in the summer of 2021 could enable the Canadian economy to grow by 4.5% or more. A later deployment would limit gains to 4%. In any case, recovery to pre-pandemic activity levels will have to wait until 2022. Beyond the virus, international uncertainty remains high, and protectionist trends continue to weigh on the prospects for an export-oriented economy such as ours. 

Consumer spending and exports: Canada’s growth engines

The Canadian government’s relief programs have contributed to a much stronger labour market recovery than the situation in the United States: as of October, 80% of the 3 million jobs lost in March and April had been recouped in Canada.

Consumption and the housing market bounced back quickly following the easing of the spring lockdown. Exports of goods (including energy) recovered fairly quickly, while service exports have not rebounded at all.

Looking ahead to 2021, Canada should see a favourable export environment, and consumption should be supported by a resilient labour market as well as continued household support programs.

Recovery limited by business investments

Our surveys of entrepreneurs show that businesses will likely postpone or cancel investments given the need to get their finances in order. However, investment in technology, remote work and online sales will continue to be important trends for the progression and growth of Canadian SMEs in 2021.

The “buy local” mindset is gaining popularity and could be a growth opportunity for Canadian businesses. However, the protectionist trend that is gaining ground in many countries may pose a threat to exporters.

Ontario expected to post the best growth in 2021

In general, economic growth is expected to be higher in provinces that were hit hardest by the economic fallout of COVID-19 in 2020.

Growth Expectations by Province

  • Ontario – 4.5%
  • British Colombia – 4%
  • Quebec – 4%
  • Alberta – 3.5%
  • Saskatchewan – 4%
  • Manitoba – 3.5%
  • Atlantic Canada – 2% – 2.5% (easing of the Atlantic bubble could boot an additional percentage point)

Technology at the forefront

In 2020, strong growth in remote work, elearning, telemedicine and ecommerce accelerated the adoption of technologies in all sectors of the economy. As a result, output in the technology sector fell by only 3% between February and April 2020, compared with a decline of 18% in the economy as a whole.

Nearly 40% of Canadian SMEs plan to invest in technology in 2021, which should benefit the sector. Overall, the technology sector is projected to grow by 1.1% in 2020 and then by 2.2% in 2021.

For most other sectors, the crisis looks more like a normal recession. Hard-hit at the beginning of the crisis, production levels are expected to gradually ramp up to pre-pandemic levels by 2022. 






Global economy: Time for protectionism?

The global economy will contract by 4.4% in 2020, according to International Monetary Fund (IMF) projections. This would be the first significant global contraction in over 70 years.

In response, central banks around the world are using the most expansionary monetary policies in their history. Assuming there is no pronounced deterioration in the pandemic situation, the IMF has projected international economic growth of 5.2% in 2021.

The protectionist wind seen in recent years is causing uncertainty and could blow stronger, driven by political currents advocating industrial self-sufficiency.

The growth of international trade had already slowed significantly before the pandemic. The ongoing crisis has highlighted the vulnerability of certain industries with globalized supply chains.

Moreover, it is not clear that the election of Joe Biden as President of the United States will reverse the propensity to encourage Buy American, which often shows up when the United States emerges from an economic crisis.

Growth depends on managing the pandemic

In conclusion, the growth of the Canadian economy will depend first and foremost on managing the pandemic. If mass distribution of a vaccine begins mid-year, we could see economic growth of 4.5% or more and a return to our precrisis GDP fairly early in 2022. If a vaccine is not distributed until late 2021, growth would be limited to about 4%, and full recovery of the Canadian economy would then be delayed until late 2022. In the meantime, low interest rates, a stable loonie and a more predictable geopolitical environment will limit the downside risks facing Canadian entrepreneurs.

Source: BDC