Canada's economic forecast looks good, but challenges still lie ahead: Bennett Jones report

Economic activity and employment in Canada and in advanced economies continue to show a rapid, vigorous recovery since the beginning of the COVID-19 pandemic. Still, the persistent presence of COVID pandemic is creating uncertainties that will impact hiring, investing and taking advantage of a global economic rebound, key advisers at Bennett Jones said at a recent seminar on the economic outlook for Canada.

Serge Dupont, a senior adviser with Bennett Jones, who, with former Bank of Canada Governor David Dodge, authored the firm’s fall economic outlook for 2021, noted that Canada, like most developed countries, has seen its economies rebound since the start of the pandemic in 2020.

“Real GDP is already back to pre-COVID levels in the United States, and in Canada, it will have regained its losses by the end of the year,” he said during a briefing on the report on Wednesday. Employment has also rebounded to pre-pandemic levels. Before joining Bennett Jones, Dupont was a senior executive in the Canadian government with close to 35 years of experience in economic and financial policy.

The reasons for the rapid recovery revolve around three factors, Dupont said. These factors are the resilience of employers and workers and the ability to reorganize work; the rapid delivery and generally good uptake for vaccines for advanced economies especially, with eight billion doses already administered globally; and the response of governments to support workers and businesses.

However, Dupont said there are still clouds ahead for several reasons. “The first is the pandemic itself — It’s not over anywhere until it’s over everywhere,” he said, adding that at this point, even with vaccination and medication, the ability to treat COVID-19 “like a common disease is not quite within reach — it’s a stubborn and unpredictable virus.”

Dupont said that the Omicron variant of COVID-19 is the latest reminder that successful vaccination campaigns in the advanced economies are not sufficient to put the pandemic behind us. He noted there is fatigue in continually adapting public health measures, the activity of daily life, and the workplace to counter COVID and its variants. “Yet, businesses have no choice but to be prepared for different scenarios in conducting and planning their activities.”

The second reason revolves around supply chain disruption. “Prior to the pandemic, global supply chains and logistics worked like a well-oiled machine,” Dupont said. However, rapid recovery and a sharp shift in the demand for services, consumer durables and housing have put a strain on the supply chain and are adding to inflation pressures.

The Bennett Jones report forecasts that the economy will continue a path of recovery. For the United States, on a Q4-to-Q4 basis, GDP is expected to grow 3.4 per cent in 2022 and two per cent in 2023. At the end of 2023, output would be 8.5 per cent higher than at the end of 2019. That is slightly above the pre-COVID trend.

Similarly, the Canadian economy is projected to grow “robustly” in the near term before gradually decelerating by the end of 2023. Real GDP would grow 4.6 per cent during 2022 (Q4 to Q4) and 2.3 per cent during 2023. By the end of 2023, output in Canada would be about 6.9 per cent higher than at the end of 2019, also slightly above the pre-COVID trend.

As for interest rates, Dupont said the forecast is that the Bank of Canada will probably start raising its key rate in the spring or early summer and bring it to 0.75 per cent by the end of 2022 and 1.75 per cent by the end of 2023.

The U.S. Federal Reserve is also expected to raise the Fed funds rate from 0.25 per cent currently to 0.75 per cent by the end of 2022 and to 1.75 per cent by the end of 2023. It will also terminate quantitative easing stimulus measures, perhaps as early as the first quarter of 2022.

As for inflation, Dupont and Dodge say in the report that they believe that global supply bottlenecks should diminish and be largely gone by the beginning of 2023. They believe that the current high headline rate of inflation (which includes more volatile food and gas prices) in the U.S. and Canada should diminish through 2022 and stabilize at slightly above two per cent in 2023. And despite inflationary pressures “more persistent than expected,” there will likely be no price-wage inflation spiral.

Labour markets have generally recovered from the pandemic, but structural pressures that existed before COVID-19 have been exacerbated. “Evidence of labour shortages is now more widespread, spanning high-skilled to lower-skilled occupations,” the report says. Possible solutions include finding ways to incentivize older workers not to retire, and bolstering immigration, but ensuring that credentials of those who come to Canada are recognized. “Let’s get the Uber drivers out of their cars,” Dupont said.

Since the labour shortage is also a problem of skills mismatch, there must also be more and better skills training to help raise the labour force’s productivity.

On trade, it has become clear that the United States will manage issues with its partners less on consistent principles than of domestic political calculus, Dupont said. He pointed to the proposed policy of extending rebates to electric vehicles made in the U.S. without considering the integrated nature of the North American automobile argument.

As the report says, “there is a need to step up advocacy for our interests in the United States while intensifying efforts to diversify our trade.” For example, as China contemplates joining the Trans-Pacific Partnership, there should be a hard-nosed assessment about whether China is prepared to reform its trade-distorting domestic practices. If there are positive signals, Canada could support a decision “to open negotiations as a lever to test this determination and to re-set our own relationship with China.”

The Bennett Jones report also argues for increased and better investment by both the public and private sectors. As Dupont said at the webinar: “That includes investment in physical infrastructure, buildings, machinery, and equipment, as well as intangible [areas] like software and IP.” This type of investment is needed to offset the impacts of an ageing population and capitalize on productivity-increasing measures such as artificial intelligence, robots and digitalization in sectors of the economy like financial services.

The efforts to deal with climate change and create a net-zero economy will also require increased government and private investment. As Dupont and Dodge’s outlook report says, “the path to even come close to Canada’s targets of a reduction of greenhouse gas emissions of 40-45 per cent by 2030 and net zero by 2050 requires a deep transformation of the economy, with a significant portion of the effort to be front loaded.”

It adds, “there is no scenario for sustainable growth that does not require an extraordinarily rapid, and durable, ramp up of public and private investment.” It says that non-residential investment as a share of GDP must rise above the 2021 figure of under 14 per cent to a level closer to 17 per cent before 2030, “not as a one-time high but as a new average for a period of years.” This is doable, but it “must start now.”

Bennett Jones senior adviser Anne McLellan, who held Liberal cabinet positions such as Deputy Prime Minister, Justice Minister and Health Minister, told webinar attendees that the energy sector alone will “require billions and billions of dollars in innovation and public and private investment.”

“Whether it’s enhanced electrification, whether it is an emissions free technology for oil and gas, or whether it blue hydrogen or green hydrogen, all these things are going to require a combination of private and public sector investment.”

She added there also needs to be a “higher degree of collaboration between” levels of government, or “we’re not going to be able to meet the big challenges that the [Bennett Jones] economic outlook has talked about.”

Bennett Jones’ senior business adviser John Manley, who was deputy prime minister of Canada from 2002 to 2003 during the Liberal government of Jean Chretien, also noted that Canada needs to see itself as part of the larger world. “One thing we’ve learned over the last two years is we’re not isolated. We’re not an island where we’re not seriously impacted by what’s happening elsewhere,” he said.

“Canada is very much a part of a global system,” he said, “whether it’s the pandemic, the impact on supply chains, trade issues, or geopolitical issues.”

At the end of the day, he said, “we need to be ensuring that that we’re part of a broader international community that does its part as well.”