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Outlook: Exports up and other reasons for cautious economic optimism in 2021

As we wave goodbye to a truly awful 2020, there are reasons to feel at least somewhat hopeful about the year to come. The first and most important is the arrival of vaccines against the virus that causes COVID-19.
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Jock Finlayson

As we wave goodbye to a truly awful 2020, there are reasons to feel at least somewhat hopeful about the year to come.

The first and most important is the arrival of vaccines against the virus that causes COVID-19. While Canada will trail other advanced economies in the pace of vaccinations, a steadily increasing share of our population should receive shots as 2021 unfolds, setting the stage for the (eventual) disappearance of COVID-19 as a serious public health threat.

A second piece of encouraging news is the imminent departure of U.S. President Donald Trump. An extraordinarily divisive political figure, Trump’s erratic decision-making has done considerable damage to his country, America’s alliances and the wider world. Once he leaves office, he may persist in his strange quest to inject more discord into U.S. politics. But he will no longer control the levers of governmental power. That should be positive for business and investor confidence – as recent stock market gains suggest.

A third reason for optimism is the surprising rebound in international trade after a sudden drop in the spring. In volume terms, cross-border merchandise trade has fully recovered from the earlier, pandemic-induced slide. In Canada, goods exports have retraced more than 90% of the decline recorded in the spring. A robust recovery in economic activity in China and east Asia generally over the second half of 2020 has boosted trade and should continue to bolster global demand into the new year. 

Beyond the above developments, what else will we be watching for in 2021?

Canada is poised to accumulate a lot more debt, notably public sector debt, as governments struggle to manage the second wave. The big jumps in GDP and employment in 2020’s third quarter won’t be repeated. The Bank of Canada recently warned that the first quarter of 2021 could see the economy shrink again. In this setting, the federal government will post a hitherto unimaginable $400 billion-plus deficit in the current fiscal year, with another $100 billion to $200 billion of red ink expected to follow in 2021-22. Ottawa’s debt is on track to climb well above 50% of GDP by 2022, compared with 30% five years ago.

The provinces are also adding debt at alarming pace.

While most of these fiscal injections have been needed, Canada will emerge from the pandemic with a much weaker consolidated government balance sheet. This casts doubt on the financial sustainability of major new spending programs, notwithstanding the hopes of many elected officials across the country.

Closer to home, B.C. should outperform Canada on most economic metrics in 2021-22. Low interest rates, ongoing spending on large capital projects, a pickup in immigration, decent commodity markets and a rapidly expanding advanced technology sector will help to drive economic growth.

For 2021, the province should post a 4% to 5% increase in real GDP, albeit on the heels of a record decline in 2020. It will take until the first half of 2023 (at least) before real GDP measured on a per-person basis returns to the 2019 level.

Meanwhile, parts of the economy are destined to struggle. This is especially true of tourism and travel-related businesses as well as the arts, entertainment and recreation sectors, where the recovery will be protracted.

Some segments of the retail sector are likely to contract as household spending increasingly shifts to online channels. The restaurant and food-services industry – a big employer – may be pinched by a greater propensity for in-home dining in the wake of the virus.

How optimistic are B.C. business leaders about 2021? The picture is mixed, according to the Business Council of British Columbia’s new business confidence survey. Almost half of the province’s biggest firms expect sales growth to remain fairly steady in 2021, with the remainder evenly divided between those who anticipate increases or decreases in revenue momentum. About 60% of large B.C. companies plan to slightly lift capital outlays or to hold them flat in 2021. And almost 40% anticipate adding to their payrolls in the coming year.

All in all, 2021 should bring some improvement in economic and business conditions, but it will be a bumpy ride. •

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer.