Focus
May 28, 2021 | 12:50
The Next Stage: Canada Comeback
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
The Next Stage: Canada Comeback |
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Rising vaccination rates and fading new virus case counts are allowing a few major economies to at least partially reopen, setting the stage for a more complete economic recovery in the second half of the year and into 2022. While the U.S. and the U.K. have been at the forefront both on vaccinations and reopenings, Canada has quickly climbed the global ranks on the former metric. Famously, Canada has recently surpassed the U.S. in the share of the population receiving at least a first dose, but remains a relative laggard on full inoculation (Chart 1). Yet, even partial vaccinations suggest that activity may partially reopen in certain high-contact sectors (think restaurants) over the summer, helping reverse a spring decline in activity. This could set the stage for the Canadian economy to play catch-up on the growth front over the second half of the year. |
The third wave has clearly crested in almost all major economies in recent weeks, albeit with a few tragic exceptions (Chart 2). The number of new cases continues to recede relentlessly across almost all U.S. states, for example, even with a much earlier and more aggressive reopening than in most other major economies. While case counts peaked later in the third wave in Canada, numbers are now dropping heavily almost everywhere, with the unfortunate exception of Manitoba. With the rapid improvement, most provinces are now in various stages of reopening, or are planning to, in coming weeks. So, after a run of consistently very weak data for April, and likely May too, Canada’s economy is expected to post some impressive bounce-backs in employment and retail trade in coming weeks. Having said that, the next step in Canada’s vaccination process is still important, and it’s no time to let the foot off the gas. For Canada’s economy—and critically, its job market—to fully recover requires the hardest hit sectors to recover. And, ultimately, that likely requires full vaccination of a majority of the adult population, both to support the confidence of individuals to more fully engage, and in policymakers to allow such. A wide range of industries have either thrived or already rebounded quickly from the pandemic, most obviously those that benefitted from the shift of activity online (Chart 3). As well, other industries were bolstered from a shift of spending away from services toward goods, (e.g., resources), or were little impacted directly by the pandemic, such as financial services and construction. The latter have also benefitted from the soaring housing market. While some of these trends will persist after the pandemic ends, the growth impact in these industries will subside. In this sense, the current pace in some sectors is simply not sustainable; housing is the prime example, where soaring prices (and costs) have eroded affordability and will eventually pinch demand. However, the moderation of growth will leave plenty of room for currently struggling industries (restaurants, bars, hotels, in-person entertainment, personal-care services, and travel) to come roaring back once most of the population is fully inoculated. These industries will benefit from tremendous pent-up demand and substantial excess household savings accumulated during the pandemic. The spirited comeback in the U.S. restaurant sector in recent weeks is a very positive omen for Canada’s hard-hit industry; it had been tracking the U.S. closely until the second- and third-wave restrictions (Chart 4), and could see the now-wide gap close rapidly later this year. The airline industry was one of the hardest hit sectors during the pandemic. Canadian GDP in the sector is still down 93% from pre-pandemic levels in the latest month, and employment is down 25%. This partly reflects travel restrictions, quarantine measures, and virus anxiety. As well, business travel is all but non-existent, and is unlikely to fully return to pre-virus levels as companies may prefer video meetings (especially internal) to reduce travel time and costs. However, the U.S. airline industry is now starting to turn upwards (Chart 5). Passenger levels have risen to almost 70% of 2019 trends over the past week, according to the TSA—that’s a far cry from last April when it hit a low of 4%. U.S. accommodation spending is also starting to reflect the uptick in air travel. Canada lags far behind U.S. activity, as domestic air traffic is running below levels seen last summer and international traffic remains extremely curtailed (less than 20% of pre-COVID levels) amid current restrictions. However, Canadian public health officials anticipate a broader reopening of the country is possible once 75% of adults have received their first dose of a vaccine and 20% of adults are fully vaccinated. At the current pace, Canada could achieve those targets by late June (Table 1; see appendix for details). Pent-up demand for personal travel, and to a lesser extent business travel, should provide plenty of lift to tourism once the pandemic is behind us. In a similar vein, employment in the hospitality sector should rebound forcefully at that point. Looking at the U.S. again as a guide, payrolls for hotels and restaurants recovered in April to 15% below pre-pandemic levels, even with the disappointing jobs data overall for that month (Chart 6). That compares with a much deeper 30% hole for the sector in Canada. What does this imply for the broader economy? Canada’s recent rapid ramp-up in vaccinations, and the possibility of eventually surpassing the U.S. even on second doses by August, points to a strong rebound in the second half of the year. Looking backward, the final tally on Q1 GDP (due Tuesday) is likely to reveal that the economy fared very well during the second-wave restrictions, roughly matching the sturdy 6.4% U.S. growth rate in the quarter. However, Q2 will be a different story as the third-wave restrictions bit Canada much harder, with growth likely stalling (at best), while the U.S. could perk above 8%. But, the wheel will turn again in the second half of the year and in 2022, when Canada will be playing catch-up on reopening. Canada is likely to post stronger growth rates through much of that period, also partly reflecting a comeback from a deeper pandemic hole for the economy. Bottom Line: After a sluggish start, Canada has found its stride on the vaccine rollout. That, combined with a recent fast fall in new virus cases, will help support a partial re-opening over the next month, fuelling a summer economic recovery. However, for activity to come full circle—especially in the hardest hit sectors—we’ll need to see progress on full vaccination rates. |
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Appendix: Vaccination Rate Scenario Assumptions
Written with assistance from Sal Guatieri and Erik Johnson. |