End of US-China trade war, vaccine distribution key to Canada's recovery
Improved international trade relations and the rapid rollout of an effective vaccine will be key to a strong economic recovery for Canada, according to a recent report from RSM. The accounting and consulting firm’s quarterly “The Real Economy: Canada” report provides insight and analysis into Canada’s economic fortunes.
RSM’s January report expects robust growth of 4% for 2021 and 2022, provided that widespread vaccination reopens the economy and there is a reduction in trade friction in North America. This echoes the 4% projections from the Bank of Canada. The bank notes, however, that there will be uneven gains across sectors – with bricks-and-mortar retail, travel and hospitality, and oil and gas continuing to suffer.
Canada’s real GDP declined by 0.3% year-over-year (YoY) in Q1 2020, 12.5% in Q2, and 5.2% in Q3. Job losses stood at 600,000 in October 2020 YoY – an improvement from the 2.9 million lost jobs in April 2020.
The bulk of job losses remain in the service sector, and the risk of permanent changes to consumer shopping and entertainment habits may create a long-term oversupply of labor in the services sector – dragging down wages and reducing household income.
Meanwhile, pandemic-related reduction in demand for oil has led to lower prices that have hobbled the relatively expensive-to-extract oil sands operations in Alberta. Piling onto the woes of the Albertan oil patch, President Joe Biden has announced the cancellation of the Keystone XL Pipeline, which would have helped get Canadian crude oil to US Gulf Coast refineries more efficiently.
The RSM report also notes that Canadians are saving rather than spending during the pandemic. In the three quarters prior to the pandemic, Canadians were saving between 1.4% and 2%; household savings soared to 27.5% in Q2 2020 and 14.6% in Q3 2020. Continued depression in household spending risks turning the pandemic’s supply shock into a demand shock – depending on how long it takes for vaccines to reopen the economy.
Canada isn’t doing well in its vaccine distribution thus far, hampered by delayed shipments from foreign producers and inefficient distribution of vaccines within the country. Canada sits at 34 in Bloomberg’s vaccination rankings, with only 2.70 doses administered per 100 people. With Canada’s current rate of vaccination, it would take more than 10 years to reach 75% coverage in the country.
By comparison, the US is in sixth place with 11.17 doses administered per 100 people, and is on track to reach 75% coverage by the end of 2021. Israel sits atop the vaccination rankings at 58.53 doses administered per 100 people, and is on track to reach 75% coverage in two months.
Canadian economic recovery would also be aided by an expansion in US and international trade, says RSM. The importance of international trade to Canada’s economy has roughly doubled since 1961, with total exports and imports accounting for 67% of GDP in 2019.
And since Canada’s economy is so intertwined with the US, Trump’s trade war with China has caused nearly the same economic damage to Canada as it has to the US. The potential re-entry of the US into the Trans-Pacific Partnership (TPP) trade agreement would provide a substantial economic benefit to Canada, according to the report.
“Given Canada's historic over-dependence on trade, as well as its integration with the U.S. economy, it's difficult to think of anything that could have a greater impact on Canada's long-term recovery than the U.S. re-entering the TPP,” said Alex Kotsopoulos, partner, projects and economics with RSM Canada. "This was a deal that President Trump walked away from in 2017, but the incoming Biden administration has hinted at its intent to re-enter the agreement, while also potentially ending the country's trade war with China. Both actions could lead to substantial economic benefits for countries like Canada, which have been harmed by association through these trade disputes in recent years."
