Header_Drivers
Head_Mary
Header_Spirit
Header_Choice
Cover Story January/February 2021

Economic Recovery in 2021 Looks Promising Thanks to COVID-19 Vaccine

RBC Economics releases Macroeconomic Outlook outlining what to expect for the economy this year

By Stefanie Ucci

As we enter 2021, many people may be looking forward to a brighter year as the world rolls out the COVID-19 vaccine and slowly starts recovering from the pandemic.

According to the Macroeconomic Outlook report released in December 2020 by RBC Economics, the exact timing of the economic recovery isn’t certain as there are logistical challenges from the manufacturer based on the distribution of the vaccine. “The surge in infections in recent months and re-imposition of containment measures sets up for a soft start to 2021 to be followed by a healthy rebound as the vaccine becomes widely available,” says RBC. “On net, we look for the U.S. and Canadian economies to post gains of 4.4 per cent and five per cent, respectively.”

RBC expects that Canada and the U.S. will finish off the year 2020 with gains, while the Euro-area and U.K. are “projected to contract” due to their stricter lockdowns. “Substantial monetary and fiscal policy support will underpin modest growth in all four economies in early 2021 with the momentum building as more people are vaccinated, restrictions ease and confidence improves,” says the RBC Macroeconomic Outlook.

Due to a rapid increase in COVID-19 infections throughout late 2020, the labour market recovery slowed down following rapid gains that took place throughout the summer when infections were at their lowest point. During this time, the unemployment rate also inched lower as workers became concerned about the long-term impact of the pandemic. The restrictions and non-essential service closures towards the end of 2020 are also expected to place the U.S. economy on a slower growth trajectory in early 2021.

The RBC Macroeconomics Outlook forecasts that the COVID-19 vaccine will substantially reduce restrictions in summer 2021. “Low interest rates, elevated savings, and job creation will support consumer spending and housing. Business spending is also forecasted to rise as companies restock inventories and invest to expand their capacity,” says RBC. “By year-end 2021, we expect the U.S. economy will be operating with little economic slack and expect inflation to be running around two per cent.”

Canadian economy expected to recover to pre-COVID-19 levels in 2021

According to the RBC Macroeconomic Outlook, the big increase in COVID-19 infections during the fall created restrictions and closures, however it “didn’t lead to a full retrenchment.” Areas of the economy that are still under pressure include hospitality, recreation, and travel. Meanwhile, the manufacturing sector is near pre-pandemic levels and the housing industry has more than fully recovered.

“Retail sales also bounced back quickly, although the closure of non-essential retailers in some regions late in the year likely tempered sales. While lockdowns will restrain the economy’s growth in late 2020 and early 2021, our forecast assumes a stronger and sustained recovery in activity once the vaccine is more widely distributed. By the end of 2021, we project the GDP will be back to pre-shock levels,” says the RBC Macroeconomic Outlook.

As for the Canadian dollar, it has recovered all losses related to the pandemic against the U.S. dollar, due to an improvement in risk appetite. “The rebound in equity and non-energy commodity prices supported the Canadian dollar’s rise,” says RBC. “The currency is expected to hold onto its gains in the first half of 2021.”

Due to a great amount of savings by Canadian households throughout the pandemic, this will be a key driver to help the economy recover to pre-COVID-19 levels in 2021. The RBC Macroeconomic Outlook estimates that these savings surpassed $160 billion, since most Canadians weren’t able to spend money on regular services and items, on top of their financial aid from government support programs. “As the economy fully reopens, we look for consumer spending to remain strong as they pare down savings and return to work,” says RBC.

Businesses should go into 2021 with caution

Though the economy is expected to see increases and improvements throughout 2021, there is still a need to be cautious about business recovery.

The RBC Macroeconomic Outlook says that “Investment and inventory rebuilding are expected to begin in 2021 although given the uncertain global backdrop and changes to consumer demand, the recovery may be slow. This is particularly true in the energy sector with oil prices likely to remain below pre-pandemic levels. Purchases of machinery and equipment and intellectual property are projected to return to pre-crisis levels by the end of 2021 as businesses increase capacity and upgrade their processes to align with shifts in demand that evolved during the pandemic.”

Additionally, government support programs that were introduced to help households and businesses battle the economic impact of the pandemic will remain in place for the first half of 2021. However, RBC says that those supportive measures will likely not be enough to save every business, causing “the near-term economic backdrop” to be “very challenging.”

Businesses can benefit from extended wage subsidies, rent relief, and loans to help them through the crisis.

“A variety of income supports are underwriting household incomes. In sum, the federal government’s COVID economic response plan is slated at $282 billion with an additional $50 billion planned for next fiscal year,” says the RBC Macroeconomic Outlook. “The Bank of Canada’s substantial support also remains in place. We expect the bank to maintain a policy rate of 0.25 per cent throughout 2021 and continue to purchase securities, albeit at a gradually reduced pace, to keep longer-term rates low for borrowers. These measures have already supported a historically rapid rebound in the housing market.”

The overall takeaway from the RBC Macroeconomic Outlook is that individuals and businesses can remain hopeful for what comes following the COVID-19 vaccine rollout. This will lead to a promising recovery for Canada’s economy in 2021, but individuals and businesses are advised to tread lightly and enter the new year with caution and a realistic economic position.

Authors
Craig Wright – SVP & Chief Economist
Dawn Desjardins – VP & Deputy Chief Economist
Nathan Janzen – Senior Economist

Source: RBC Economics – Macroeconomic Outlook

Related posts

The Resilience of Franchising

admin

Leading Strong

admin

Keeping Up with the Boomers

admin