BDC Monthly Economic Letter December 2020
21 trends that will shape the 2021 recovery
The year that is drawing to a close has been an uphill battle for many entrepreneurs. Fortunately, 2021 already looks more promising, despite significant remaining challenges. This economic letter presents 21 trends that will have an impact on the economy in the coming year.
The health outlook
- In the coming months, the trajectory of the economy will depend primarily on how the pandemic evolves. Although the number of new cases of COVID-19 infections is lower in Canada than elsewhere in the world (graph), several provinces are implementing new measures to limit the spread of the virus. In general, the stricter the rules, the more the economy will be affected. We don’t expect a significant improvement in the pandemic before spring.
- The arrival of a vaccine appears to be near. Several pharmaceutical companies report efficacy rates of more than 90%—a remarkable breakthrough in such a short time. Pending approval of vaccines by health authorities, many questions remain about the logistics of global distribution.
Canada has ordered enough doses to theoretically achieve herd immunity. However, bottlenecks could initially force priority vaccination for certain groups. This would result, for a period of time, in continued health measures and restrictions that should, however, be less severe than at present.
- A projected economic contraction of 5.5% in 2020 will be followed in 2021 by Canadian GDP growth of 4% to 4.5%, depending on vaccine availability. A slowdown in the Canadian economy, observed in the last quarter of 2020, is expected to continue into the first part of the new year.
- A few sectors did well in 2020, including retail and real estate. Continued government income support for households affected by the pandemic should support consumption. A significant decline in immigration in 2020, combined with tighter mortgage lending conditions, could limit the potential of the real estate sector, particularly in urban centres.
- Investment will remain low, while entrepreneurs prioritize the improvement of their financial situation. Nevertheless, our research suggests they intend to invest more in technology, particularly to improve their ability to sell online and support remote work.
- For the sectors most affected by the pandemic, such as accommodation (chart), transportation and food services, the recovery will unfortunately be muted in 2021. Although a vaccine will soon be available, health measures will likely be maintained until herd immunity is reached. It will also take a few years for international tourism to make a full recovery
- Forget about U, V, W or L scenarios to illustrate the economic recovery. It is increasingly clear the current recovery is K-shaped: A rapid recovery for some sectors (V), while others continue to suffer the effects of the pandemic (L). Women, youth and immigrants have benefitted less than average from the economic recovery that began in May, according to employment statistics.
- The health situation will limit the recovery in oil demand for at least the first half of 2021. High inventories limit prospects for price increases. Maintaining current prices will therefore depend on continued OPEC+ cooperation. The new U.S. administration’s opposition to the Keystone XL pipeline also represents a risk for Canadian producers. (See the oil article for more details.)
- The Canadian dollar, which has strengthened since the beginning of the recovery, is expected to remain in a range of US$0.75 to US$0.78 in the absence of significant jolts to the oil market. The anticipated convergence of Canadian and U.S. monetary policies until 2023 should limit the loonie’s volatility against the U.S. dollar.
- Business survival rates will need to be closely monitored. Our surveys indicate that 87% of Canadian entrepreneurs expect to still be in business a year from now. However, a significant number of businesses remain inactive, and the longer they are shut, the greater their chances of not rebounding.
In August, there were 9% fewer active companies than the average in 2019. The situation has probably deteriorated since then, given the tightening of health measures in several provinces. In response, the federal government is maintaining its assistance programs for businesses. The more businesses that close their doors, the more difficult the economic recovery will be.
The international scene
- International observers will remain focused on China. Since being the first hit by the virus, China has experienced a V-shaped recovery, making it the only major economy to post GDP growth in 2020 (1.9%). The International Monetary Fund (IMF) expects growth of 8.2% in 2021.
- Next year will be one of recovery in all advanced economies. The most affected countries in Europe in 2020, including France, Italy and the United Kingdom, are expected by the IMF to grow by more than 5% but still fall short of their pre-pandemic levels of activity.
- Exports of goods recovered during the summer, reaching 95% of the level reached the previous year, according to the OECD. Nevertheless, protectionist tendencies continue to gain ground. In October, the IMF identified 120 new export restrictions introduced in 2020. This is a trend to watch for Canadian exporters.
- In the same vein, December 31 will mark the implementation of Brexit. At the time of this writing, an agreement between the British government and the European Union had not yet been signed. The prospects for a hard Brexit remain, with potentially serious economic consequences, including tariffs, tight customs controls and logistical challenges related to the border between Northern Ireland and the Republic of Ireland.
- On the other hand, new free trade agreements could help counter protectionism. In November, Britain and Canada agreed to respect the terms of the Comprehensive Economic and Trade Agreement, which also remains in force between Canada and the European Union.
On the other side of the world, the largest free trade agreement has just been signed. The Regional Comprehensive Economic Partnership (RCEP) brings together 15 Asia-Pacific economies, including Australia, China, South Korea and Japan, representing 30% of the world’s GDP. This agreement could put pressure on the Biden administration to rejoin the transpacific agreement.
- Environmental protection is expected to return to the forefront in the coming years. President-elect Joe Biden’s desire to see the United States join the Paris Accord on climate change will set the tone. Canada’s formal commitment to achieve carbon neutrality (net zero emissions) by 2050 could lead to the implementation of new environmental measures.
- There will be few noteworthy elections in 2021 with the exception of an October election in Germany, which will mark the end of Angela Merkel’s 16 years as Chancellor. An election in Iran could have an impact on geopolitics in the Middle East.
In the United States
- After a GDP contraction of 3.6% in 2020, the recovery will continue in the United States where the economy is expected to grow by 3% to 3.5% in 2021.
- Runoff Senate elections in Georgia on January 5 will have a significant impact on Biden’s agenda, who officially takes office on January 20. A victory by the two Democrats (considered unlikely at this time) would give control of the Senate to the Democrats. Any other outcome would require compromises with Republicans in the upper house, at least until the midterm elections of 2022.
- An agreement on the extension of an economic assistance plan will be necessary, otherwise, more than 10 million Americans will lose their federally funded unemployment benefits at the end of this year. Failure by Congress to reach an agreement could have a significant impact on consumption in 2021, in addition to the human cost.
BDC and entrepreneurs
21. Finally, the continuing tenacity of entrepreneurs will be necessary as we move into the new year. BDC regularly publishes content aimed at advising and informing our clients on how best to operate during the pandemic and prepare for the recovery.