Economy set to recover slowly in 2021

Vaccines against Covid-19 are starting to be deployed in Canada this week, setting the stage for an economic recovery — but the economic response won’t be instant, said RBC Economics in a new report.

In its report, the bank cautioned that while the arrival of vaccines is the key to an economic rebound, the continued rise in infections and the prevalence of public health restrictions will likely keep the economy under pressure in early 2021.

Ultimately, the economy is expected to bounce back to pre-pandemic levels as vaccines become broadly available next year.

“While lockdowns will restrain the economy’s growth in late 2020 and early 2021, our forecast assumes a stronger and sustained recovery in activity once the vaccine is more widely distributed,” said RBC. “By the end of 2021, we project the GDP will be back to pre-shock levels.”

Consumers are expected to drive that recovery as employment improves and households feel comfortable reducing their savings.

“The large pool of savings amassed by Canadian households during the crisis will be a key driver of the economy in 2021,” RBC said, noting that it estimates household savings surged by $160 billion during the pandemic, as lockdowns prevented spending and government supports propped up incomes.

Yet while consumer confidence rebounds, businesses will likely be more cautious in the coming year, RBC said.

“Investment and inventory rebuilding are expected to begin in 2021 although given the uncertain global backdrop and changes to consumer demand the recovery may be slow,” it said.

Given the continued economic uncertainty, both fiscal and monetary supports will remain in place next year, RBC noted.

It forecasts that the Bank of Canada will maintain its policy rate at 0.25% throughout 2021 and continue to buy securities to keep longer-term rates low.

Furthermore, these low interest rates and strong household savings are expected to help support the housing market in 2021. While the market is expected to slow somewhat in 2021 from its pace in 2020, sales and prices are likely to remain elevated.

Inflation rates, meanwhile, are “likely to move modestly higher” in the coming year, the report noted, as the recovery gains momentum.

Against this backdrop, RBC said the Canadian dollar will likely hold steady against the U.S. dollar in the first half of 2021 before coming under pressure in the second half as markets look for central banks to start curbing monetary stimulus.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.