In January we welcomed back Benjamin Tal, Deputy Chief Economist of CIBC Capital Markets, for his 2021 Economic Outlook. As always, Benjamin’s unique interpretation of economic data provided valuable insight for what we can expect in the coming year.
A ROUGH, BUT SHORT, ROAD
While we can’t sugarcoat our current circumstances, there are some positives to counterbalance the negatives. It won’t be an easy winter, with signs of a double-dip recession. The damage has been very deep but also very narrow, with the number of industries affected being relatively small compared to previous recessions. Businesses are showing signs of confidence, making investments and taking risks, and banking on a positive future – which wasn’t even a consideration in March 2020. We now know more about how to cope with this crisis, and we’re optimistic.
Biden is unlikely to get his $1.9 trillion COVID recovery fund but he might get $1 trillion which will give the U.S. economy a positive lift in Q1 and Q2. His $2.2 trillion infrastructure spend and Buy America is also going to drive economic growth. Ben suggests $7-8 billion will be allocated to transportation, a smaller amount to communications and the remainder going to “Green” infrastructure. Canada needs to ensure Buy America develops as Buy North America, as it did under the Obama administration.
STRONG RECOVERY IN Q3 AND Q4
After this rough road, the recovery will be strong. This is a services-oriented recession, with most services able to recover quickly. It’s the first time in Canadian history we’ve seen income rise during a recession. Households have $90 billion more surplus cash on hand than typical, and this money is sitting, waiting to be spent. High-income Canadians want to spend – but can’t. As soon as we get the green light to get out, travel, meet, socialize and shop, services will pick up again. This also explains why the housing market is so friendly. Since a large portion of households was untouched financially, in fact their income went up, it provided them a better chance to get into the market. And with a strong economic recovery we won’t see a major correction. So, while GDP currently declines at a rate of about -2%, we are likely looking at 5-6% growth before year’s end.
ARE WE EXPERIENCING AN EVENT OR A LONG-TERM CONDITION?
As we navigate recovery, it’s important to remember the pandemic is an event, and not a condition. We are in very different waters compared to 2008. We haven’t lost production capacity, or the willingness and ability to spend, and we have more than $90 billion in excess cash. This has never occurred in any other recession. With extremely low interest rates and current government policies, we will not see any scarring. Trends that were emerging in 2019 have been accelerated and exaggerated during this crisis, but the office won’t disappear, and offline shopping will come back – with quality as the dividing line. From a long-term perspective, when the fog clears, the economy will be transformed but back on track for strong growth.