Expert says Canadian economy will improve in 2021, though ‘not spectacularly’

TORONTO — After a tumultuous 2020, those with their eyes on the Canadian and global economies can expect improvements in 2021, according to one expert.

“I actually think the economy is going to do very well in 2021,” Ian Lee, an associate professor at Carleton University’s Sprott School of Business, told CTV News Channel on Friday. “Not spectacularly, but much better than in 2020.”

Lee attributes this in part to Canadians’ saving rate in 2020, which he said has “gone through the roof.”

Lockdown measures to prevent the spread of COVID-19 meant that those with disposable income had less to spend it on. Statistics Canada reports that after the first quarter of 2020, Canadians saved an average of 7.6 per cent of disposable income, up from 2.3 per cent in the first quarter of 2019.

But by the second quarter of 2020, Canadians were saving 28.2 per cent, a dramatic increase from the 3.1 per cent they were saving in 2019’s second quarter.

“I cannot remember it being this high,” Lee said.

With vaccines being rolled out in 2021, Lee said there is renewed hope that Canadians will soon be able to leave their homes and make the kinds of purchases that will stimulate the economy.

“I think we’re going to see a very significant increase in spending because people are going to be so grateful and so happy it’s behind us,” he said. “We can get out of our houses, go to restaurants, go out flying and travelling and so forth. So I think we’ll see that pent-up demand express itself in 2021.”

 

WILL SMALL BUSINESSES BOUNCE BACK?

Even with this expected spending ahead, small businesses in Canada are barely holding on, with some already forced to shutter.

“Small businesses always had much smaller profit margins than big business,” Lee said. “I think it’s inevitable we’re going to see a significant increase in failures – small business bankruptcies – over the winter months.”

Lee said he believes this “inevitable” outcome may be why many provinces have not gone into universal lockdowns, instead trying to focus restrictive measures where they were most needed to try to help those whose livelihoods are at stake.

“I don’t think it’s going to be as bad on small businesses,” Lee said of the year ahead. “But it’s still going to be negative, no question about it.”

But he adds if governments continue to make these lockdown considerations in the new year, it could allow small businesses to generate some cash flow.

“Between that and the backstops provided by the government, I think they’re hoping it’ll be enough to carry them through the winter into the spring when the vaccine starts rolling out,” he noted.

 

REAL ESTATE MAY NOT BE NOT AS GOOD AS IT SEEMS

One of the key backstops provided by central banks, including the Bank of Canada, is record low interest rates, which has led some to seek approval for a home mortgage.

And while low rates may be good for those seeking a loan, it’s also led to rising home prices, making the buyer’s market more competitive and pricey.

“I don’t think we’re going to see in 2021 the average increases in real estate prices that we saw in this last year,” Lee said. “It’s not sustainable.”

Lee points to a collapse in immigration levels in Canada due to the pandemic as a contributing factor.

“People don’t realize […] the impact of immigration – the positive impact of immigration,” Lee said.

Immigrants need homes in Canada, Lee said, but can also bring wealth with them to spend in the Canadian economy.

All this, he said, will yield lower real estate prices in 2021: “I think it will be much more modest this year.”

 

U.S. POLITICS COULD IMPACT STOCK MARKET

With several uncertainties still ahead in 2021, a rise in the stock market is anything but a sure thing despite low interest rates, reopening economies and more liquidity.

“I don’t think it’s going to explode,” Lee said, pointing to the changing administrations in the U.S. as a possible “wildcard.”

U.S. President-elect Joe Biden has announced plans for a stimulus for Americans, as well as plans for improving infrastructure, which Lee said could “rev up” the U.S. economy, but Biden’s plans may be constrained by the Republican-controlled Senate.

Democrats have an opportunity to take hold of the Senate Jan. 5, but only if they can win both of the Georgia runoff elections.

“It’s unpredictable, but I don’t think we’re going to see huge increases in the stock market averages for 2021,” Lee said.

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