Coming off a horrendous 2020, the Canadian economy is poised for its strongest growth in 20 years, says BMO Capital Markets.
In a new report, the firm said that it expects GDP growth to reach 5.0% this year. Despite a forecast that’s higher than the consensus view, BMO also sees upside potential, if the second wave of Covid-19 eases sooner.
“The best thing about the past year is that it’s over, and the year ahead could be one of the best since the start of the century,” BMO said in its report.
“More fiscal juice should push the economy over the second-wave hump, while the vaccine rollout will speed up the recovery, though labour markets will take much longer to heal.”
In the short term, however, BMO is projecting pain.
Amid tougher public health restrictions in certain regions, including Ontario, Quebec and Manitoba, “GDP growth will likely slow to a crawl in Q1,” the report said.
But after a rough winter, BMO expects the economy to rebound by 8% annualized in the second quarter.
“Although some hard-hit services industries will struggle until most of the population is inoculated (likely in the summer), the goods-producing sector will continue to expand,” the report said.
“Recent double-digit gains in house prices and record equity markets will support household wealth and spending.”
The resource sector is expected to help drive growth in the new year amid stronger commodity prices.
“Most importantly, it’s all guns blazing for fiscal policy,” BMO said, noting that Canada has led major countries in providing fiscal stimulus to its economy, and is expected to provide continued support over the next couple of years.
Throughout the recovery, interest rates are expected to stay at near zero, BMO noted, as unemployment remains elevated.
The Bank of Canada will “use forward guidance and bond purchases to limit upward pressure on long-term rates,” BMO said. “We expect the 10-year bond yield to rise about 40 basis points to 1.1% by year-end.”
As for the Canadian dollar, which gained about 2% in 2020, BMO said it’s expected to “strengthen modestly to $1.25 (or 80¢ US) by late 2021” — driven by higher oil prices and reduced demand for the U.S. dollar as a safe haven.
“This is near purchasing power parity, limiting its impact on the economic recovery though keeping the trade deficit large,” BMO said.
Amid the rosy forecast, BMO noted that uncertainty remains substantial.
“Major downside risks include a possible glitch in vaccine rollout (say due to safety concerns), a more adverse mutation of the virus, and the unwinding of fiscal stimulus later this year,” the report said.
Additionally, a drop in asset prices could slow spending.
For a change, there’s also upside risk for the economy: “A smoother rollout of vaccines could lead to early herd immunity,” the report said. “As well, flush with savings, consumers could ‘let loose’ after spending a year in Covid prison.”
A Democrat win in two Senate runoff seats could also boost fiscal support in the U.S., enabling “a wave of new spending on infrastructure, education, housing, child care and the environment, with some offset from higher corporate income taxes and tighter regulations.”