Blue Book: 2021 National Outlook
BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Economist, provided an overview of the macroeconomic indicators across Canada.
Overall, we expect 6% growth for the Canadian economy, thanks to strength in commodity markets and in the U.S. economy. We’re also starting from a stronger-than-expected position—the Canadian economy grew at nearly a 10% annual rate in the fourth quarter of 2020 and continued growing in January, despite the fact that the country was in the heart of the second wave of COVID-19 infections.
Despite the strong outlook, we don’t expect any movements in short-term interest rates. In its most recent statement, the Bank of Canada confirmed that the economy has done better than expected, but they're still concerned about the underlying weakness in the job market. At this point, we're looking for the Bank of Canada and the U.S. Federal Reserve to hold interest rates steady until the middle 2023.
There is some upside risk for inflation, largely because we’ll be comparing figures to last spring when prices tumbled, particularly for gasoline. But we don’t believe any increase in inflation will be sustained and should settle back to just over 2% on average for this year and 2022.
Overall, the economy is poised for a solid rebound over the next 18 months.
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Doug Porter:
Well, thank you very much, Sheri, and good morning, everyone. Thanks for joining us. Thanks for taking some time out of your busy day to spend some time with us going over the economic outlook. As Sheri mentioned, I'm going to spend about the next 10 to 15 minutes or so basically setting out the big picture view, how financial markets are gauging this recovery, and then landing on what it might mean for the Canadian economy as a whole. Then, I'll hand over to my colleague Robert Kavcic to dig into some of the details, what it means for Ontario more specifically.
I have to start with everybody's least favorite topic, and that, of course, is the virus. On that front, there has been some good news in recent weeks. We have seen the number of new cases come down and come down aggressively right around the world. This chart does look at it on roughly a per capita basis so you can get a sense of how Canada is fairing versus the big five European economies and the US.
The story there is that it really does look like the second wave crested pretty much around the world in the first half of January. Now, there are a few cautionary notes here. First of all, as you can see in Canada, it looks like the progress has stalled out. If anything, the number of new cases actually backed up a little bit in recent days, and of course, there's also the concern about the new variants which do seem to be taking over center stage at this point.
Again, from a very big picture, we've seen a sharp decline in new cases and new hospitalizations as well. Of course, offsetting the recent somewhat less good news on the number of new cases is, the vaccine news has generally been positive in recent weeks.
It does look like after a slow and stumbling start here in Canada, the pace of vaccination is going to pick up markedly. Now, just this morning, we got some concerning news about the AstraZeneca vaccine and the fact that some Scandinavian countries are halting that, but I would point out that's just one vaccine and is quite different from the others, so I don't think it changes the broader landscape.
I guess I would be concerned that it might actually increase vaccine hesitancy a bit, but at least at this point, hesitancy really hasn't been a big concern. We've actually seen the lineups. We've seen people in some cases actually trying to jump the queue. Hopefully, this doesn't significantly alter how many people ultimately get the vaccine.
We have been assuming that the vast majority of US adults will get a vaccine by June, and in Canada, by September. If anything, the news in recent weeks looks like that timeline is way too cautious. President Biden has actually talked about all Americans possibly getting the vaccine by as early as May. Some Premiers are now aiming at the adult population in their provinces getting it by the end of June. It may well be that we've actually underestimated or been a little bit too conservative in our assumptions around the vaccine.
Again, the important news is, we have seen quite a pickup in supplies recently and it does look like the pace is about to pick up in a meaningful way. Now, financial markets have basically built-in a very strong recovery at this point. They're looking well beyond the pandemic; they're looking 12 and 24 months down the line, and what they're looking at is a very robust recovery.
This is a message we're hearing right across the board in financial markets, it's not just the equity market. As we speak, despite that vaccine news overnight, we've got the TSX at a new all-time high, Dow has also been at a new all-time high today. Yes, tech stocks have corrected in the last couple of weeks or so, but even they look like they're beginning to firm again.
This is not just a North American story, it's not just a technologies stock story, this is a very broad-based rally we've seen in global equity markets; it's gone way above and beyond just repairing last spring's damage. The market is clearly signaling quite a strong recovery. Again, it's not just equities, we're seeing it also in corporate bond spreads, which, after a spasm last spring, are basically back to pre-pandemic levels or even lower. This is a very important signal for economy watchers.
The corporate bond market is a very good leading indicator, and what it is pointing to is a solid rebound. Finally, commodity prices, which I don't have charted here, but to me, if anything, that's been the most impressive recovery at all. Given the fact that we've just been through the deepest downturn in the post-war era globally, to have commodity prices completely reversing last year's damage, and that in fact, in some cases, like lumber, and some days, metal prices getting all-time highs is just extraordinary news.
It speaks to the very rapid recovery we've seen in things like the purchases of big-ticket items in the manufacturing sector, in construction as well, the extent to which commodity prices have been able to recover.
Now, another market that's also pointing to a strong recovery is the bond market. In recent weeks, we've actually seen quite an upswing in long-term interest rates and not just in the US and Canada, right around the world. A lot of that is related to the view that the bond market too is beginning to fully price in quite a strong US and quite a strong global recovery in the year ahead.
We believe that the bond market is almost completely priced in, robust recovery, and so we actually don't see much further upward movement in bonds from current levels. As we speak, 10-year yields in Canada and the US, 10-year government yields are close to 1.5%. That's basically where they were before the pandemic began.
Not really that different from just over 12 months ago.
We do see a little bit of further headway for these yields, but we think the big move's actually already behind us. Now, for shorter-term interest rates, the rates that the Central Banks can more directly control, the overnight interest rate, which leads to variable mortgage rates and reflects prime lending rates, these rates we think will be steady for quite a long period of time.
It was almost exactly a year ago that both the Bank of Canada and the Federal Reserve cut these rates to the bone, essentially as low as they thought they could take them, and there they have stayed over the last year. We think that both the Bank of Canada and the Federal Reserve will be extraordinarily patient before they start to raise these interest rates.
We heard that message again, just yesterday from the Bank of Canada in their latest statement where they admitted, yes, the economy has done better than they expected. They're still concerned about the underlying weakness in the job market and the bank, basically, reinforced the message that they are going nowhere fast. At this point, we're officially looking for the bank and the Federal Reserve to hold interest rates where they are until the middle part of 2023.
There is a slight risk, they could go a little bit earlier than that, but I'm here to tell you that if they go earlier than 2023, that is phenomenally good news. That means absolutely everything has gone right in the world in the next two years to get the Bank of Canada and the Federal Reserve to raise interest rates sooner than 2023.
One common question I get is, "Well, with policy this extraordinarily stimulative, with this comeback in commodity prices, with a relatively robust economic recovery rolling our way, are we not risking a bit of inflation at this point?" It is true that inflation rates are probably a little bit higher now than they were before the pandemic began, which is a very unusual situation to be in. Again, think about it, we've just been through an incredibly deep economic downturn, and yet, inflation pressures have reemerged from that, a bit higher than they were before. Again, a lot of that goes back to the fast rebound in commodity prices and the massive degree of fiscal and monetary stimulus we're seeing.
Now, it seems a bit strange to be talking about upside risk for inflation when headline inflation in Canada right now is at 1%. It's a little bit higher than that in the US, a bit lower than that in Europe, it's actually negative still in places like Japan and China.
In the next few months, we're going to get some pretty impressive meaty headline inflation readings. A lot of that is because we'll be comparing ourselves to the extreme situation of last spring when prices tumbled in the early days of lockdown, especially things like gasoline prices, but some other prices tumbled as well. Combined with the big bounce-back that we've seen gasoline prices recently, and we are likely to get a little bit of a burst in headline inflation in the next three months or so.
In Canada, we think headline inflation will temporarily get above 3%; in the US, we think it could get as high as 4% in the next few months. The important message I want to leave you with, though, is we don't think that that's going to be sustained, we think that it will prove to be a passing phase and that inflation will settle back to just a little bit above 2% on average this year, and similar that course next year.
Looking out three to five years, I still think it's reasonable to assume that inflation will average about 2%, but again, I have to admit that there's a bit more upside to that view than there's been in the past. As I said, essentially, the central banks have told us that if they're going to make a mistake, it's that they'll keep interest rates too low for too long, and even risk a little bit of inflation in the years ahead.
Now, I do want to spend just a minute talking about the Canadian dollar. One of the reasons why we're even talking about a bit of upside risk to inflation is this rapid comeback in oil prices. Last spring, at one point for a couple of days, we actually had negative oil prices, something we've never seen before. Well, those days are well, well in the rearview mirror. Because of very impressive supply discipline among OPEC, we've got oil prices back above $60 a barrel. That's actually higher than it was a year ago, that's higher than it was just before the pandemic began.
We think some of this is a little bit overstated, and that oil prices will edge their way back down. We're assuming an average oil price of $60 a barrel this year. That's a big supportive factor for the Canadian dollar. It's a big reason why the Canadian dollar has made such a quick rebound over the past year.
During the turmoil last spring, the Canadian dollar actually fell below 70 ¢ at one point. We're now close to 80 ¢. Looking ahead, we're not especially bullish on the Canadian dollar, we think the Canadian economy has a lot of medium-term competitiveness challenges. There are a lot of important tailwinds behind the Canadian dollar at this point, global tailwinds. Things like robust commodity prices, an oncoming solid global recovery always good news for the Canadian dollar.
Just the outlook for the US dollar itself is a bit mixed at this point. The US dollar has been actually quite weak for the last 10 months. That's been one of the key reasons why the Canadian dollar was able to rebound so quickly, is a more broad weakness in the US dollar.
Looking over the next 12 months, we think these factors are largely offsetting. We think the US dollar will stabilize over the next year. On balance, we see the Canadian dollar grinding a little bit further ahead, largely on the basis of a very strong global recovery.
On that point, my last two charts are on the growth outlook. Starting from the very big picture on the global outlook, first of all, I have to put it in context, we're coming off again, the worst year for the global economy in the post-war era fell by almost 4% last year. We've never seen anything close to that since the Second World War. Every single economy in the world was caught up in this, every single economy went through a global downturn last year.
Now, that was last year; looking into this year, we expect every single major economy to see quite a strong recovery. Now, there will be variations as we go up and down the list. Some got hit harder last year, and we'll see a bigger rebound this year, some are more reliant on the service sector in tourism, and will be slower to recover, and I'm thinking places like the Caribbean and in Europe on that front.
We think every major economy will see solid growth of some sort this year, and for the global economy as a whole, we're looking at 6% growth, a very strong year, well above average. We see some of that flowing over into next year when we think growth will be almost 5%.
Last chart for me is on the North American. We'll look what that means. We actually just overnight revised up our growth rate on the US economy. Largely, that small upward revision, we've added a half a percent to both this year and next year to the US economy, is because of the stimulus package that's about to get signed into law by President Biden and the checks will start flowing out the door.
When Biden first proposed 1.9 trillion in stimulus, we thought maybe 1 trillion to 1.5 trillion of that would get through Congress; instead, it pretty much went through as Biden asked. That is an enormous amount of money. It is going to give a powerful upward push to an already re-opening US economy.
We may well be conservative looking for 6.5% growth in the US this year. By the way, 6.5% growth would be the strongest growth performance in the US economy since the Reagan boom back in 1984 which was led by the enormous tax cuts, another big stimulus package, back in the early and mid-1980s. Now, what does this mean for Canada? Well, it's unambiguously good news to have our biggest trading partner growing at better than 6%.
Just last week, we upgraded our call in Canada to 6% per year and that would be the strongest growth pace in Canada since 1974. Three big reasons for our relative optimism. One is that strength in the US economy. Second is that strength in commodity markets which is leading to a much better outlook nationally. It's having important consequences, not just the firm's bottom lines, but actually just supporting real activity in all the commodity-producing regions.
The third factor is just the starting point is better than we expected. News just came out last week that the Canadian economy managed to grow at almost a 10% annual rate in the fourth quarter of last year and it's still managed to grow in the month of January.
Think about that. January was in the heart of the second wave. We were still facing incredibly tough restrictions in Ontario throughout January and we still managed to grow. It's mostly because sectors like construction and housing resources and manufacturing were still able to grow even during a very, very challenging time for small businesses and the service sector and the retail sector more specifically. The goods-producing sector, the big heavyweight industries managed to off-set that temporary weakness in the services sector.
As services begin to re-open this year, we do believe that the Canadian economy will come back fairly powerfully through the later stages of this year. By the way, just to put this forecast into context, we're not wildly out of bounds with other forecasters. Many others, we think, will be in the range of 5% to 6% as well. We think some of that strength will flow through to 2022.
Just wrapping it up, big picture story is we do believe that the economy is poised for a relatively solid rebound over the next 18 months. With that very big picture view, I'd like to end it there and I'll now hand it over to my colleague, Robert, to dig into some of the regional details. Thank you very much.
Douglas Porter
Chief Economist and Managing Director
Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Economist at BMO Financial Group and author of the popular…(..)
View Full Profile >BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Economist, provided an overview of the macroeconomic indicators across Canada.
Overall, we expect 6% growth for the Canadian economy, thanks to strength in commodity markets and in the U.S. economy. We’re also starting from a stronger-than-expected position—the Canadian economy grew at nearly a 10% annual rate in the fourth quarter of 2020 and continued growing in January, despite the fact that the country was in the heart of the second wave of COVID-19 infections.
Despite the strong outlook, we don’t expect any movements in short-term interest rates. In its most recent statement, the Bank of Canada confirmed that the economy has done better than expected, but they're still concerned about the underlying weakness in the job market. At this point, we're looking for the Bank of Canada and the U.S. Federal Reserve to hold interest rates steady until the middle 2023.
There is some upside risk for inflation, largely because we’ll be comparing figures to last spring when prices tumbled, particularly for gasoline. But we don’t believe any increase in inflation will be sustained and should settle back to just over 2% on average for this year and 2022.
Overall, the economy is poised for a solid rebound over the next 18 months.
This is part 1
of a
7-part series on
Blue Book: 2021 National Outlook
PART 2
Blue Book: 2021 Atlantic Provinces Outlook
Robert Kavcic | March 31, 2021 Economic Insights
BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Econom…
PART 3
Blue Book: 2021 British Columbia Outlook
Robert Kavcic | March 31, 2021 Economic Insights
BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Econom…
PART 4
Blue Book: 2021 Greater Toronto Area Outlook
Robert Kavcic | March 31, 2021 Economic Insights
BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Econom…
PART 5
Blue Book: 2021 Ontario Outlook
Robert Kavcic | March 31, 2021 Economic Insights
BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Econom…
PART 6
Blue Book: 2021 Prairies Outlook
Robert Kavcic | March 31, 2021 Economic Insights
BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Econom…
PART 7
Blue Book: 2021 Quebec Outlook
March 31, 2021 Economic Insights
BMO recently held a virtual event (in French) to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s …
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