Canada’s economy endured an historic collapse in 2020, but surged into 2021 faster than most expected

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Canada’s economy surged into 2021 with more momentum than most expected, as companies restocked in anticipation of future demand and those Canadians left relatively unscathed by the COVID-19 crisis continued to plow money into real estate.

Statistics Canada on March 2 reported that gross domestic product (GDP) grew at an annual rate of 9.6 per cent in the fourth quarter, about twice as fast as the Bank of Canada predicted in its latest economic outlook in January.

The miss probably won’t significantly alter the central bank’s plans, at least not until a critical mass of the population is vaccinated and it becomes clear that COVID-19 variants don’t pose a significant danger. The rebuilding of stockpiles accounted for about 75 per cent of the growth in the fourth quarter, and economists tend to distrust inventories as a predictor of underlying demand. Household spending dropped at an annual rate of 0.4 per cent, reflecting stricter pandemic controls and elevated unemployment levels.

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Weak employment swamps all other concerns in Ottawa right now. Bank of Canada governor Tiff Macklem last week reiterated that he intends to keep interest rates extremely low for at least a couple of years, telling the Calgary Herald’s Chris Varcoe that “we are losing productive workers, we are losing productive capacity in our economy.”

Statistics Canada’s preliminary accounting of economic output in 2020 makes Macklem’s case. The hole left by the COVID-19 crisis is immense: GDP contracted by 5.4 per cent in 2020, the biggest collapse since 1961, when the agency began tallying quarterly economic output. By comparison, GDP dropped 2.9 per cent in 2009 in the wake of the Great Recession, and decreased 3.2 per cent in 1982, when many of the world’s richest countries were grappling with high interest, inflation and unemployment rates.

The 2020 recession was unusual because service providers took the biggest hit. Many of those companies remain the most vulnerable to the virus and the approaches governments take to managing the pandemic. Output by the food, beverage and accommodation industry dropped 11 per cent in the four quarter from the third quarter, Statistics Canada said.

“We have started laying off people now permanently,” Charles Khabouth, chief executive of Ink Entertainment, a Toronto-based owner of bars and restaurants, told the Financial Post’s Larysa Harapyn on Feb. 25. “We will probably be 25 (per cent) to a third less employees than before the pandemic.”

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Still, for many investors, the economic destruction of 2020 is last year’s story. Financial markets have grown edgy about inflation, and evidence of faster-than-expected growth could exacerbate such worries. Statistics Canada in a separate report on March 2 said GDP likely increased 0.5 per cent in January from the previous month, suggesting the first-quarter contraction that the Bank of Canada and others anticipated will be avoided.

Housing is the controversial star of the recovery story, albeit with substantial support from the federal government and central bank.

Investment in real estate increased 3.9 per cent in 2020, defying early warnings from Canada Mortgage and Housing Corp. (CMHC) that the recession could crush our insatiable demand for houses. Instead, spending patterns shifted, as professionals bet on a future in which they would be working from home, rather than making daily commutes to the office.

Buyers sought bigger properties in suburbs and smaller cities, spreading the mania that has long gripped Vancouver and Toronto to places such as Ottawa and Moncton, N.B. They were able to do so because they were either among the lucky ones who kept working, or because they benefited from generous emergency assistance.

Disposable income increased 10 per cent from 2019 because the federal government opted for emergency benefits that erred on the side of too much, rather than too little. The savings rate surged to 15.1 per cent in 2020, as households hoarded salaries and benefit payments equivalent to the previous seven years combined, Statistics Canada said.

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The combination left many households primed to take advantage of near-zero interest rates, which the Bank of Canada would have anticipated, although perhaps not to the extent that ultimately transpired. Macklem last week said he was seeing early signs of “excess exuberance” in the housing market.

In the short term, the housing boom has lessened the economic pain of the recession, but at the expense of deepening vulnerabilities that existed before the pandemic.

“We never pretended to have a crystal ball,” Evan Siddall, the head of CMHC, tweeted on March 1. “We remain very concerned about even a partial reversal” of the factors driving demand, he said in a separate tweet, adding a list of negative side effects that include increased debt, the diversion of capital to an unproductive investment, and increasing inequality between owners and renters.

An unambiguously positive surprise has been the rebound in exports. Canadian governments were unwilling to impose the same strict lockdown measures that allowed Asian economies to crush the virus, nor were they willing to tolerate the death toll that came with the laxer approach to social distancing in the United States. But exporters are benefiting from resurgent demand from both of those places, especially Asia, which is driving commodity prices higher.

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Cargo through the Port of Vancouver increased one per cent last year, despite an epic recession, led by record shipments of grain and potash. “We’ve been very fortunate,” Robin Silvester, chief executive of the Vancouver Fraser Port Authority, said in an interview on March 1. “We’re seeing a really strong start to the year, continuing the trend that we saw toward the end of 2020.”

That’s good, because Canada’s economy will need ballast for a while yet. “Nobody is going to book anything now until 2022,” Khabouth said. “In my opinion, 2021, on a large scale, is a writeoff for primarily all of Canada.”

Financial Post

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