US stimulus package, resurgent US economy buoy Canada's prospects

The US $1.9 trillion stimulus package will help drive Canada’s economy to 6.5% growth in 2021, according to RSM Canada’s second quarterly economic update.

The OECD’s most recent economic outlook report is more reserved, anticipating 4.7% Canadian GDP growth in 2021 – though the organization cautions that much will depend on the “race between vaccines and emerging variants of the virus.”

With modeling suggesting a doomsday scenario of 30K daily cases by the end of May, Ontario has entered another hard lockdown. Premier Ford’s reluctance to effectively tamp down Covid-19 rates to lower levels before reopening (numerous times), the insistence on half-step measures that please no one (especially public health experts), and the unimpeded spread of more contagious variants has brought the province to the breaking point. Canada’s slow rate of vaccination means that Ontario won’t be able to jab its way out of its mismanagement of the pandemic either.

Though Canada’s economic and population center continues to struggle under the weight of the provincial government’s gross incompetence, the United States’ massive stimulus package and aggressive vaccination rollout present a much-need life preserver for Canada’s economic prospects.

Canada’s economic fortunes have been intertwined with the US since the country’s birth, and a healthy American economy means better times for its northern neighbour. The US is Canada’s most important trading partner, accounting for 74% of Canada’s exports.

The OECD is expecting the US economy to actually outstrip its pre-pandemic 2019 projections by 0.2% in 2021. Canada’s GDP, in comparison, will fall short of the November 2019 projection by -3.2%.

The massive scale of the US relief package (13.1% of GDP) will boost US economic activity and consumer spending. This will, in turn, lead to increased Canadian resource extraction, manufacturing, and services provision as US demand recovers.

Canada’s federal stimulus (3-4% of GDP) has been integral to keeping the country afloat, but its combination with the $1.9 trillion US relief package is the key element to any expected recovery, according to RSM’s report.

“Buoyed by government spending and aggressive monetary policy, the Canadian economy has recovered nearly 90% of the economic output lost as a result of the pandemic, setting the stage for what is expected to be Canada's fastest rate of growth in a generation,” Joe Brusuelas, chief economist at RSM US, said.

“While the federal government's upcoming budget will attempt to accelerate recovery, it is the American Rescue Plan that, when combined with Canadian relief efforts, will lift the economy out of its slumber. Payments being sent directly to Americans will unleash consumer spending, which in turn will fuel a robust expansion this year and next. Canada's economy will benefit as a result," Brusuelas added.

Though the consulting firm’s projections, which were published Friday, expect GDP growth of 6.5% for Canada in 2021, risks to the outlook “include the potential reinstitution of lockdown measures as a result of a third wave of the coronavirus and lagging vaccination rates.”