Forecasting is a tough business at the best of times, but 2020 was particularly difficult as all estimates were made redundant as early as the first quarter. However, research house Capital Economics has ventured to offer some key themes that could set the tone in Canada in 2021.
There has been much talk of the Liberals’ precarious minority government and whether Justin Trudeau would gamble to secure a fuller mandate. A CBC Poll Tracker suggests there is a 43% chance of a Liberal majority win, and a 47% chance of the Liberals winning the most seats but without a majority.
The Liberals got an early popularity boost this year for its handling of the first wave of the coronavirus, but since then it has flagged due to the WE Charity scandal and the high debt accumulated to the fight the virus. Capital Economics forecasts a snap election to be on the cards in 2021.
#2: THE LOONIE
Stephen Brown, senior Canada economist at Capital Economics, expects the loonie to appreciate further in the new year. “Several forecasters have recently raised their expectations for the loonie to be closer to our own, but the published consensus forecast is still that it will end 2021 only slightly higher than its current level of $0.78. We expect a much stronger appreciation to $0.82,” the economist said.
#3: PROPERTY MARKET
The economist also expects the Canadian property market to remain robust despite some concerns that housing is showing signs of fatigue, especially in light of lower unemployment and immigration levels. “But we think the only big risk to the housing market is a sudden rise in bond yields, and we see little chance of that happening after the Bank of Canada’s recent pledge to keep rates low across the yield curve,” Brown noted. “We expect house prices to continue to post decent gains, with house price inflation according to Teranet averaging 6% in 2021.”
The federal government has pledged to fill crucial labour market gaps and accelerate immigration levels to around 1% of the population of Canada, including 401,000 permanent residents in 2021, 411,000 in 2022 and 421,000 in 2023. The previous plan set targets of 351,000 in 2021 and 361,000 in 2022. Brown expects immigration to return to pre-pandemic levels, boosting the economy beyond 2021.
Finally, the worst fears of scarring should prove unfounded and the Canadian economy would rebound impressively next year. With the Bank of Canada expected to maintain quantitative easing well into 2022, oil prices hovering around US$60 per barrel, and the fiscal stimulus kicking in, Canadian GDP could end up 2% higher.
“The Bank of Canada slashed its estimates of potential GDP growth earlier [in 2020], but there are reasons to think it might have to push them back up again,” Brown said. “For example, the Bank’s forecast that potential labour force growth will be 0.7% in 2022 and 0.6% in 2023, compared to 1.2% in 2019, look inconsistent with the government’s now much higher immigration targets. And the Bank’s decision to halve its estimate of potential productivity growth to just 0.5% in 2022 will be harder to justify if the recovery in investment takes hold sooner than the Bank’s current forecasts imply.”
Source: Financial Post