With covid-19 vaccines being administered, many economies should pick up steam in the second half of this year. That momentum is expected to continue in 2022, with financial markets and housing also expected to remain strong.
However, there are a lot of downside risks in the next six months, said Craig Alexander, chief economist with Deloitte LLP in Toronto. People aren’t receiving vaccines as quickly as expected. New Covid-19 mutations are spreading. Meanwhile, Covid fatigue is setting in even as many jurisdictions have recently extended and expanded restrictions.
Furthermore, most countries will take a number of years to get back to pre-pandemic output levels. Forecasts for closing the output gap — the difference between what an economy is and could be producing — range from early 2022 to sometime in 2023, with a lag of 12 to 18 months before jobless rates return to pre-Covid levels. Companies don’t hire until they are sure stronger demand will be sustained.
As a result, interest rates are likely to stay low, which means the next 12 to 18 months could be the “sweet spot” for equities for this decade, said Sébastien Lavoie, chief economist with Laurentian Bank in Montreal.
The strong equities market means investors are less interested in gold and low-risk, US$-denominated fixed income — which is likely to contribute to further weakening of the greenback against most currencies, including the loonie.
Beata Caranci, chief economist with Toronto-Dominion Bank, said in early January that the loonie could soon rise above US$0.80. She also said the price of West Texas Intermediate oil could rise to US$54 by the end of 2022.
Recovery at home and abroad
Last year, real GDP dropped 5.7% in Canada and 3.5% in the U.S. Caranci forecast Canadian growth of 4.9% this year and 3.8% in 2022, versus 4.1% and 3.3% in the U.S.
In Canada, both fiscal and monetary policy are expected to be accommodating through 2023. In fact, Alexander said interest rates may not reach “neutral levels” until 2024 or even 2025. Both the Bank of Canada and the U.S. Federal Reserve Board want to see the output gap fully closed and unemployment back to pre-Covid levels before they raise rates.
However, fiscal restraint aimed at lowering deficits could start in 2023, Alexander said, with taxes likely to rise that year and possibly in 2024 and 2025.
TD expects the Canadian unemployment rate to be about 6%, down 30 basis points from its level in the first quarter of 2020, by the fourth quarter of 2022. In the U.S., TD expects 4.6% unemployment by Q4 2022, up 80 basis points from Q1 2020.
TD made its forecast before the Georgia run-off gave the Democrats control of the U.S. Senate. A fully Democratic Congress means incoming President Joe Biden can provide more income support than a Republican-controlled Senate would have approved, which should enhance economic growth. However, taxes increasing at the same time could negate the stimulus. Biden has also promised a big infrastructure program, but that will take time to get going.
Looking to the rest of the world, China has bounced back quickly, bringing much of the rest of Asia with it, while Europe and Latin America have been hit hard and are struggling.
Recovery in many countries will have a K shape, meaning it will take longer for low-income earners to bounce back. Many of their jobs may never return. For example, some of the increase in online shopping during Covid will continue, eliminating retail store jobs. More employees continuing to work at home, at least part of the time, could result in fewer people eating out. Many restaurants and bars have already permanently closed as a result of the pandemic.
Targeting income inequality
The pandemic’s economic effects have not been borne equally. The virus showed the fault lines in unemployment insurance, highlighted the need for people to work in several places to make ends meet and shed light on the lack of benefits for part-time workers.
Young people and women have also been disproportionately affected by the recession. Between February and December 2020, 413,900 jobs were lost in Canada. People aged 15 to 24 held almost half of those lost jobs, despite making up less than 13% of employment. For all ages, women accounted for 60% of the job losses.
The situation is similar in the U.S. For example, an analysis from the National Women’s Law Center found that all the jobs lost in December belonged to women, with unemployment particularly pronounced among Black and Hispanic women.
In response to these trends, Lavoie said, there has been talk in Canada of universal child care and pharmacare — the federal government’s fall economic statement included commitments related to both.
The Fed changed its long-term goals in August to make them “more inclusive,” Lavoie said. That includes managing monetary policy to reduce unemployment for Black and Hispanic people. He expects the BoC to make similar changes reflecting Canadian demographics.
There also will be a need for skills training programs to support low-skilled workers who lost jobs that won’t come back, said Stéfane Marion, chief economist with National Bank.
Permanent changes?
The work-from-home trend “could be a big negative for downtown cores,” Lavoie said. Companies forced to use video conferencing may continue the practice, cutting travel costs and demand.
Travel is a critical sector. Charles Burbeck, a global equities investor in London, said leisure travel could be back to 80% of normal capacity by mid-2021, but probably won’t reach 100% for two to three years. Business travel, he added, could be even slower to return, taking five years to get back to pre-Covid levels.
Stay-at-home orders have also led to a new demand for living space: for example, single-family homes rather than condos, Alexander said. More people are also interested in buying recreational properties, expanding their homes and installing swimming pools.
Avery Shenfeld, chief economist with CIBC, warned that not all businesses will survive and rebuilding gutted Main Streets will take time. On the other hand, retail and office vacancies will make recovery quicker than in most previous recessions, when goods production was hardest hit and companies had to make expensive capital investments to increase production capacity.
Manufacturers will rethink supply chains and the possibility of producing more inputs domestically, Marion predicted. That would increase costs of production and, thus, consumer prices. Marion noted, however, that domestic production likely won’t ramp up quickly.
While Burbeck agreed there will be supply chain changes, he said he doubted there will be much reshoring. Instead, multinationals are diversifying to other low-wage jurisdictions. Some parts of supply chains have moved from China to places like Vietnam, Bangladesh and Mexico. For example, Apple is moving some production of its iPads and MacBooks to Vietnam.
Burbeck noted that outgoing U.S. president Donald Trump unsuccessfully used tariffs to incentivize U.S. companies to reshore from China. In November, the U.S. trade deficit in goods was the highest on record.
“Many middle-level office and banking jobs will either eventually be taken over by technology or outsourced to other parts of the world,” Burbeck predicted. These jobs are held by educated people who are paid middle-income salaries. Outsourcing and automation could further increase income inequality, he warned.