After the crisis, a gradual rebound

After suffering its sharpest contraction on record in 2020 because of the COVID-19 pandemic, Canadian growth is expected to bounce back in 2021. Pent-up demand in 2020 owing to restrictions to limit the spread of the disease is expected to make household consumption (almost 60% of GDP) the main driver of the rebound. Household confidence is expected to improve, particularly if a vaccine is rapidly deployed, and incomes should be lifted by the decline in the unemployment rate from its peak in April 2020 (13.7%) and by budgetary support measures to respond to the crisis. Nevertheless, the retail and clothing sectors, whose difficulties have been exacerbated by the crisis, are expected to continue to see numerous bankruptcies. While the government should gradually withdraw support measures, public consumption should still fuel growth in 2021. Exports will benefit from the combined effect of improved economic conditions in the United States and higher oil prices. Nevertheless, prices will still be relatively low and this, combined with a lack of transport capacity, will mean that the energy sector continues to underperform. In this regard, uncertainties surrounding the completion of oil pipeline projects remain, as demonstrated by U.S. President Joe Biden's decision to cancel the permit for the Keystone pipeline on his first day in office. The oil sector is expected to be a drag on the rebound in corporate investment, which will, moreover, be constrained by increased balance sheet vulnerability in the wake of the crisis. Conversely, low mortgage rates, with the central bank expected to keep its policy rate at a record low of 0.25% in 2021 (-150 basis points in 2020), and property demand will support residential investment. A wave of personal bankruptcies was avoided in 2020 thanks to government support and payment deferrals, but vulnerabilities associated with household debt will continue to be monitored.

The recovery plan will maintain a large budget deficit

In the aftermath of the COVID-19 pandemic, the unprecedented support measures taken by the government in response to its impact, coupled with the revenue decline, resulted in a record budget deficit. In the fiscal year 2021/22, the deficit is expected to narrow significantly, benefiting from an increase in revenues associated with the rebound inactivity and a reduction in expenditure as temporary support measures expire. Employment Insurance (EI) benefits are set to decline, while the Recovery Benefit (for those ineligible for EI) and Emergency Wage Subsidy (to allow employers to partially cover employee wages) programs are set to expire in 2021. Although shrinking, the deficit is expected to remain high, with the government pledging between CAD 70 and 100 billion (between 3 and 4% of GDP) of spending over three years to stimulate the recovery, with details provided in the next budget. The fiscal situations of the provinces and territories, starting with Quebec and Ontario, also deteriorated because of the crisis and contributed to the jump in public debt in 2020. However, after deducting, among other things, assets held by the Canada and Quebec Pension Plans, net public debt remains relatively low (45% of GDP).

In 2021, the current account deficit is projected to widen slightly, driven by the balance of goods deficit. Higher imports, in line with the recovery in domestic demand, will be the major reason for this. In addition, payments for travel and transport services are expected to increase gradually, fuelling the services deficit. After recording a small surplus in 2020 due to the accelerated repatriation of FDI profit dividends, the income account could return to a small deficit in 2021. The transfer deficit is expected to continue to make a relatively minor contribution to the current account deficit. The country is heavily dependent on foreign portfolio investment to finance its deficit. External borrowing may also be necessary. This would add to the already substantial external debt (129% of GDP by mid-2020), most of which is owned by the private sector (about 80% of the total).

Federal elections in 2021?

Justin Trudeau, who has been prime minister since November 2015, held onto his job following the October 2019 federal election but had to form a minority government after his Liberal Party lost 20 seats and the majority (157 of 338). The Conservative Party, which gained 26 seats, remains the main opposition, while the Bloc Québécois became the third-largest party in the House of Commons after winning 32 seats, a 22-seat increase. In 2020, the government’s handling of the COVID-19 crisis boosted the popularity of the prime minister and his party in the polls. This resurgence, which might enable the Liberals to regain a majority in the event of early elections, continued despite a scandal involving the prime minister over the award of a government contract to WE Charity and the appointment of Erin O'Toole as the new leader of the Conservative opposition. If popularity keeps improving, the government could call a snap election in 2021, as no minority government has ever been able to serve a full term. While strained during Donald Trump’s tenure, relations with the United States may warm up following the election of Joe Biden, but differences will remain over trade and energy policy. Moreover, relations with China remain tense since Canada arrested a senior executive of the Chinese company Huawei in 2018.