Waiting on economic growth

The 2021 economy is off to a disappointing start as lockdowns continue and job losses pile up amid a second wave of Covid-19. Still, poor economic performance wasn’t unexpected and likely won’t persist, CIBC’s chief economist says.

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“We long ago realized it wouldn’t be clear sailing right at the start of the year,” said Avery Shenfeld, chief economist at CIBC.

Months ago, a vaccine rollout in early 2021 was the best-case scenario, Shenfeld said in an interview on Feb. 2.

While that scenario is indeed unfolding, mass vaccination and a return to normal in Canada and the U.S. likely won’t occur until late summer or fall, he said.

His outlook for first-quarter economic growth is negative.

“We’re expecting to potentially see a bit of a decline in Canada and some sluggishness in the U.S.,” Shenfeld said. However, “we’ll make all of that back in the latter part of the year as the economy responds to vaccines.”

CIBC’s forecast for real GDP growth (annualized) in Q1 is −0.9%, followed by 2.8%, 7.6% and 7.2% for Q2, Q3 and Q4, respectively. For 2021 overall, the bank’s forecasted GDP growth is 4.3%.

For the U.S., the bank forecast GDP growth of 1.9% for the first quarter and 4.3% for the year.

To achieve those growth levels, vaccines must reduce hospitalizations and death rates so normal activities can resume, Shenfeld said, and a key factor will be how well vaccines work against emerging Covid-19 variants.

“Fortunately, we do have some assurance from some of the vaccine developers that they can tweak their vaccines if need be to make them better able to respond to those new variants,” he said.

In the meantime, investors continue to take a longer view, looking past current uncertainty. Equity markets remain close to record highs, following last month’s volatility related to certain shorted stocks.

“Equities are going to trade based on where the economy is likely to be in the post-vaccine world of late this year and into 2022, and should be largely able to shrug off some of the challenges we’re facing,” Shenfeld said.

As those challenges ease and economic growth recovers, investing opportunities will emerge.

“The real opportunities in the equity market are for the companies that struggled during this pandemic,” Shenfeld said. Equity market highs during Covid-19 were largely driven by “huge winners” that benefited from pandemic trends, he said, such as Shopify and Amazon.

“To get the rest of the market moving is really a case of waiting for vaccines to come, waiting for consumers to broaden their activity in the economy to the kind of services that have been held back by the pandemic,” Shenfeld said.

In a blogpost last week, Sonal Desai, chief investment officer, fixed income, at Franklin Templeton, said investing opportunities arising from an improving macro outlook are “good reason to keep some firepower in liquid assets.”

The strong recovery will likely provide a “healthy reflationary shock,” Desai wrote, so Franklin Templeton’s fixed-income strategies will focus on limited duration, with gold and commodities also being attractive. Select emerging markets debt should also provide opportunity.

A key risk to watch is vaccine uptake, Desai said. A Franklin Templeton study suggested some U.S. health-care workers were reluctant to take the Covid-19 vaccine relative to the flu shot. Better information from policy-makers could help alleviate that gap.

“To halt a pandemic, it’s not enough that a vaccine exists — we need something closer to an ‘everyone takes it’ approach,” Desai wrote.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.