Why growth could surprise to the upside

Canada’s post-pandemic economic growth could surprise to the upside, according to CIBC Economics.

In a new report, CIBC argued that the Bank of Canada’s outlook for the economy’s potential growth rate — the ceiling for non-inflationary real GDP advances — may be overly pessimistic. The central bank predicts potential growth will be cut to an average of 1% over the next three years.

CIBC, however, is optimistic about a rebound in demand when the economy reopens — and a capacity to supply that demand.

Household incomes, the bank noted, have been “well supported” throughout the pandemic. Low-paid workers accounted for the bulk of job losses, and the benefits they received were generous relative to lost income.

“Those who have maintained employment have generally been middle-to-higher earners whose spending has been curtailed by social distancing, resulting in a build-up of excess cash worth 4% of annual consumption,” the report said.

Those savings could fuel spending when “people feel safe to come out of their home bunkers,” CIBC noted.

CIBC also predicted there won’t be a shortage of labour supply to meet that pent-up demand when it’s finally unleashed. The majority of jobs lost during the pandemic, the report said, were low-skilled jobs.

“As demand for dining out, live entertainment and travel return, we won’t face a lot of training requirement to find waitstaff or baggage handlers,” CIBC said.

Some sectors, such as physical retail, won’t make a full comeback, the bank said. But there will be opportunities for “similarly skilled” workers in warehouse fulfilment centres, for example, as e-commerce continues to displace physical stores.

The economy will also benefit from Canada’s plans to ramp up immigration in the years ahead, CIBC said.

The energy sector — a source of high-paying, high-skilled jobs — has been hit hard by the pandemic, with production estimates scaled back even for the post-Covid period, CIBC said. However, “the scale of that hit relative to the national economy doesn’t appear large enough to justify the Bank of Canada’s pessimism on overall potential GDP,” the report said.

CIBC predicted demand will surge in Canada and the U.S. in the second half of 2021, leading to “solid gains in excess of what their central banks are projecting for 2022.”