Waiting on Economic Growth

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Avery Shenfeld

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Avery Shenfeld, chief economist at CIBC.

When we look at the Canadian economy’s picture for 2021, we long ago realized that it wouldn’t be clear sailing right at the start of the year. If anything, if you go back six, eight months ago, the fact that we have any vaccines rolling out in the first part of the year was in some sense the best-case scenario of where we thought we would be.

Nevertheless, it’s obviously frustrating that we’re still wrestling with waves of the coronavirus and still really waiting until the spring before we see the kind of mass vaccination effort in Canada — or for that matter likely even in the U.S. — where we really can go back to normal life. That really is not likely to happen until late summer or early fall.

To me, the economy feels a lot like the way your kids feel in the back seat of the car. We’re getting frustrated by a long drive and asking, “Are we there yet?” We’re clearly not there yet. It will have an impact on first-quarter growth, which we’re expecting to actually potentially see even a bit of a decline in Canada and some sluggishness in the U.S. But I think we’ll make all of that back in the latter part of the year as the economy responds to vaccines.

This is a case for investors of keep your eye on the more distant outlook. I think that 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 that we’re facing while we wait for that to come into fruition.

For investors, the real issue isn’t so much the precise timing of the vaccines but simply put, how well they’re going to work and how much response we get in the economy as they unfold. Lately, there have been some concerns about vaccine efficacy with regards to some of the new variants of Covid that are out there. Fortunately, we do have some assurance from some of the vaccine developers that they can tweak their vaccines if need be in order to make them better able to respond to those new variants.

But, ultimately, what we have to think of is, are the vaccines going to reduce hospitalizations enough, are they going to reduce the death rates enough that life can return to normal? Because the real opportunities in the equity market are for the companies that struggled during this pandemic. Remember that although the equity market has taken new highs, particularly in the U.S., right during this very turbulent period for the economy, that’s been largely driven by companies that have been huge winners because of the pandemic and the shifts that that’s enabled in consumer activity.

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. At least so far, nothing we’re hearing from the epidemiologists and the infectious disease experts have changed our view that vaccines will be effective enough to bring life back to normal before the end of the year.