The global economy is in the midst of a powerful recovery, even as COVID-19 continues to pose a threat – albeit diminishing – to public health. In fact, the strength of the current global rebound has generally caught participants in the global economy off guard.
The same dynamic is at play in Canada and British Columbia. While provinces continue to deal with a challenging public health situation, some, including B.C., are already planning for a phased reopening of the economy. This reopening, combined with a range of economic drivers, should lead to rapid growth over the next couple of years. We expect the B.C. economy to expand by 6.4% this year and another 4.4% in 2022, making this the highest observed growth since 1987-88.
Rarely have fundamentals appeared so positive. Looking externally, the United States is set to experience spectacularly strong growth of nearly 7% this year followed by growth of nearly 4.5% next year.
Roughly 50% of B.C.’s merchandise exports go to our southern neighbour, so a strong U.S. economy has powerful impacts on our own economy. The strength in the United States, combined with a robust rebound in China and other parts of the world, has led to a powerful bounce-back in commodity prices. Softwood lumber prices, for example, are near record highs and are multiple times their historical average.
Looking internally, last year’s fiscal support package created a surge in personal and nonpersonal deposits that largely remain in the financial system. Canadian firms and households held over $350 billion more in deposits in February this year relative to last February. These funds will eventually be spent, invested or used to pay down debt. There is already plenty of evidence to suggest that households have been eager to buy a broad range of goods, which in many cases has led to inventory shortages. Anyone try to buy a bicycle recently?
Equally importantly, the rise in equity and housing markets has substantially increased household wealth in Canada. There are, of course, important distributional impacts as wealth is concentrated in higher-income households, but wealth effects are nevertheless an important driver of consumer activity in Canada. While we do not expect house prices to continue to rise at the pace observed in recent months, we think the insufficiency of home construction in light of past and expected population growth will continue to exert upward pressure on house prices even as interest rates eventually rise. The situation in the housing market is also leading to a surge in new construction and renovations. This, too, is expected to continue, and perhaps even accelerate as building materials become easier to source as the year progresses.
Owing in part to the factors above, we have witnessed a spectacular recovery in employment in B.C. April employment, still impacted by COVID containment measures, was a mere 23,000 off its pre-pandemic level. While unemployment remains well above pre-pandemic levels, we expect that to fall sharply as we reopen.
Business confidence is also on the rise, with the Canadian Federation of Independent Business’ business barometer for B.C. near the peak levels seen over the 2016-18 period. Firm creation has been rapid, and there are now more businesses operating in B.C. than existed pre-pandemic.
Perhaps the biggest economic kick will come from a resumption of tourism when borders are eventually reopened. Prior to the pandemic, tourism accounted for about 3.5% of provincial GDP. Destination British Columbia reports only 9,631 visitor arrivals in March 2021. For perspective, March 2019 saw 346,276 arrivals.
We know from survey data and U.S. cruise and airline bookings that there is massive pent-up demand for travel, and a rapid resumption of tourist inflows will likely occur when the decision is made to allow tourist travel.
Adding to these positive factors, the Bank of Canada is likely to keep interest rates at current levels until 2022’s second half, so financing costs should remain very low from a historical perspective. There are clear inflationary pressures linked to supply shortages now given the surprisingly rapid economic recovery. We think those pressures will fade in the fall and allow the Bank of Canada to raise rates gradually beginning next summer
It’s tempting to look at our public health challenges and conclude that our economic situation is precarious. There are still too many British Columbians who remain deeply affected by the pandemic and whose economic fate is tied to lasting success in our fight against COVID-19. Economic fundamentals are, thankfully, in a much better position than our public health situation. We are in the early months of what appears to be a nearly unprecedented two-year period of growth. Businesses that are able to look through current pandemic challenges and plan for a better future are likely to have a big advantage over firms that wait for further evidence that the recovery is moving ahead. •
Jean-François Perrault is Scotiabank’s senior vice-president and chief economist.