Roaring 20s Redux?
The 1920s are often held in a nostalgic light. For eight straight years, U.S. real GDP ran at an average rate of 5%. Pundits now muse about a repeat of this golden age in the 2020s. Is this realistic, or merely wishful thinking?
The optimism largely stems from the policy response to the pandemic. Central banks slashed rates to near zero and plan to sit tight for at least another year. Governments unleashed a torrent of stimulus that not only cushioned the downturn but will propel the recovery this year. Much of the stimulus remains parked in household piggy banks, ready to lift a wave of pent-up demand for deferred services. Record equity markets and soaring house prices have inflated household wealth, another source of spending. The demographic hurricane named Millennials are buying homes and raising families, two activities that tend to drive extra spending. Accelerated business spending on digital technologies promises to awaken productivity.
No doubt these factors will drive stellar GDP growth in the U.S. and Canada this year, likely in the 6% range. However, the potential to sustain growth anywhere near this rate in the years ahead will be limited by several factors:
- Aging populations tend to spend and work less: The Census Bureau projects that the share of the U.S. population age 65 years and older will climb from just under 17% at the start of the decade to just over 20% at the end. Canada’s population is expected to age a little faster, with the similar share rising about 4 ppts to just over 22%. The shift will dampen consumer spending and, via increased retirements, restrain labour force growth.
- Excess household savings aren’t a bottomless well: We estimate that excess savings in the U.S. and Canada could support about three years of typical increases in consumer spending. However, surveys also suggest that the bulk of savings, perhaps two-thirds, will be used for debt repayment and investments, cutting this windfall of support to about one year.
- Fiscal growth-drag looming: Unless you subscribe to Modern Monetary Theory and believe large fiscal deficits can be sustained almost indefinitely, an expected reduction in current sky-high shortfalls will act as a drag on growth, even as the deficits add to the level of GDP.
- Interest rates won’t stay low forever: While many, including us, have doubts about this statement, our base-case view is that the Bank of Canada and the Fed will lift rates gradually starting in early 2023, resulting in some drag on growth.
- Shortages and bottlenecks will limit supply growth: Supply shortages have surfaced very early in the current recovery, notably in labour markets. In fact, a pronounced mismatch of U.S. workers' preferences and skills has already emerged, related in part to a preference for more flexible jobs or new positions outside their former industry, as well as to an acceleration in automation. The mismatch could linger long after the pandemic is over, preventing many businesses from fully meeting demand.
- Imbalances in general have already popped up: These include inflated asset prices (equities, housing, cryptocurrencies, collector items, etc.) and additional debt incurred by government and businesses. There’s no free lunch in economics; at some point these imbalances will impede future growth, though hopefully in a gradual rather than sudden fashion.
- Don’t forget that Canadian households still have record debt: While Canadian household debt relative to income has improved during the pandemic due to income-support programs and increased savings, and net worth is at all-time highs amid surging home and equity values, debt remains at a record level, and will act as a headwind on spending when interest rates rise.
- Globalization may be reversing: Due to increased protectionism between the world's two largest economies and some reshoring of manufacturing, the intense global competition of recent decades may take a hit.
- Diminished capital spending: While M&E investment has rebounded strongly in both countries, ongoing pandemic-related uncertainty could act as a brake for some time.
Bottom Line: The U.S. and Canadian economies are well positioned for a Roaring 2021 and possibly 2022, but don’t get your hopes too high for the rest of the decade.
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Sal Guatieri
Senior Economist
Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with two decades experience as a macro economist. With BMO Financial Group since 1994, his m…(..)
View Full Profile >The 1920s are often held in a nostalgic light. For eight straight years, U.S. real GDP ran at an average rate of 5%. Pundits now muse about a repeat of this golden age in the 2020s. Is this realistic, or merely wishful thinking?
The optimism largely stems from the policy response to the pandemic. Central banks slashed rates to near zero and plan to sit tight for at least another year. Governments unleashed a torrent of stimulus that not only cushioned the downturn but will propel the recovery this year. Much of the stimulus remains parked in household piggy banks, ready to lift a wave of pent-up demand for deferred services. Record equity markets and soaring house prices have inflated household wealth, another source of spending. The demographic hurricane named Millennials are buying homes and raising families, two activities that tend to drive extra spending. Accelerated business spending on digital technologies promises to awaken productivity.
No doubt these factors will drive stellar GDP growth in the U.S. and Canada this year, likely in the 6% range. However, the potential to sustain growth anywhere near this rate in the years ahead will be limited by several factors:
- Aging populations tend to spend and work less: The Census Bureau projects that the share of the U.S. population age 65 years and older will climb from just under 17% at the start of the decade to just over 20% at the end. Canada’s population is expected to age a little faster, with the similar share rising about 4 ppts to just over 22%. The shift will dampen consumer spending and, via increased retirements, restrain labour force growth.
- Excess household savings aren’t a bottomless well: We estimate that excess savings in the U.S. and Canada could support about three years of typical increases in consumer spending. However, surveys also suggest that the bulk of savings, perhaps two-thirds, will be used for debt repayment and investments, cutting this windfall of support to about one year.
- Fiscal growth-drag looming: Unless you subscribe to Modern Monetary Theory and believe large fiscal deficits can be sustained almost indefinitely, an expected reduction in current sky-high shortfalls will act as a drag on growth, even as the deficits add to the level of GDP.
- Interest rates won’t stay low forever: While many, including us, have doubts about this statement, our base-case view is that the Bank of Canada and the Fed will lift rates gradually starting in early 2023, resulting in some drag on growth.
- Shortages and bottlenecks will limit supply growth: Supply shortages have surfaced very early in the current recovery, notably in labour markets. In fact, a pronounced mismatch of U.S. workers' preferences and skills has already emerged, related in part to a preference for more flexible jobs or new positions outside their former industry, as well as to an acceleration in automation. The mismatch could linger long after the pandemic is over, preventing many businesses from fully meeting demand.
- Imbalances in general have already popped up: These include inflated asset prices (equities, housing, cryptocurrencies, collector items, etc.) and additional debt incurred by government and businesses. There’s no free lunch in economics; at some point these imbalances will impede future growth, though hopefully in a gradual rather than sudden fashion.
- Don’t forget that Canadian households still have record debt: While Canadian household debt relative to income has improved during the pandemic due to income-support programs and increased savings, and net worth is at all-time highs amid surging home and equity values, debt remains at a record level, and will act as a headwind on spending when interest rates rise.
- Globalization may be reversing: Due to increased protectionism between the world's two largest economies and some reshoring of manufacturing, the intense global competition of recent decades may take a hit.
- Diminished capital spending: While M&E investment has rebounded strongly in both countries, ongoing pandemic-related uncertainty could act as a brake for some time.
Bottom Line: The U.S. and Canadian economies are well positioned for a Roaring 2021 and possibly 2022, but don’t get your hopes too high for the rest of the decade.
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