The Canadian economy is entering 2022 with solid progress in recovering from the pandemic. In September, employment returned to its pre-COVID level. GDP should recover its losses before the end of 2021.

In the Bennett Jones Fall 2021 Economic Outlook, we look at how growing our economy sustainably over the long term will require exceptional collaboration between the public and private sectors, within the frame of a growth strategy.

Growth will also require an accelerated response to the structural challenges of population ageing, the digitalization of the economy and climate change.

Fall 2021 Economic Outlook

Our baseline outlook to the end of 2023 reflects the judgement that global supply disruptions and bottlenecks will diminish and be largely gone by the beginning of 2023.

The Bank of Canada has ended its QE program, while holding its policy rate at 0.25% until economic slack is absorbed. Government support to the economy has been significantly tapered, but remains significant.

The Canadian economy is expected to grow robustly in the near term, before gradually decelerating to a rate close to potential by the end of 2023. Real GDP is projected to grow 4.6% during 2022 (Q4 to Q4) and 2.3% during 2023.

By the end of 2023, output in Canada will be about 6.9% higher than at the end of 2019.

Under this scenario, core inflation will fall to slightly over 2% by end-2022, and remain there in 2023. The Bank of Canada will probably start raising its policy rate in the spring or early summer, and bring it to 0.75% by the end of 2022, and 1.75% by the end 2023.

Risks to the outlook for Canada are essentially the same as for the global economy, thus predominantly on the downside, especially in 2022.

Companion Papers

This Economic Outlook is issued jointly with companion papers authored by colleagues in the Public Policy group reviewing, respectively, the labour market, the trade environment, energy and climate and digitalization in the financial sector.

The Labour Market: Recovery, Gaps and Strategies

Our labour markets have largely recovered from the pandemic but pressures that existed pre-COVID have resumed and indeed have been exacerbated. Evidence of labour shortages is now more widespread, spanning high-skilled to lower-skilled occupations. The policy and market response can include growing the supply of labour: incenting older workers to stay in the workforce, to and beyond age 65, and bolstering our immigration intake of knowledge workers by ensuring that their credentials are properly and quickly recognized. Since the labour shortage is also a problem of skills mismatch, there must also be heightened public and private sector efforts, and greater success, in skills training that will also help raise the productivity of the labour force.

Climate and Energy: Accelerating a Necessary Transformation

Coming out of the COP26 in Glasgow, global public and private sector leadership has affirmed ambitious climate targets, including deep reductions in greenhouse gas (GHG) emissions by 2030, and net zero emissions around mid-century. To date, the plans of economies globally are not aligned with their policy pledges, and projections show the world still falling far short of its targets. Canada, in particular, has ambitious targets but it is still essentially in the starting blocks on emissions reduction. Securing the necessary investments and driving change requires drawing on the forces of technology, markets and policy operating together and closing critical gaps. Sustained progress requires acting simultaneously and collaboratively on a number of policy and market levers: measurement and disclosure of emissions, investment, innovation and trade.

The Trade Environment: Evolving Context and Canadian Priorities

On trade, it is clear, whether under President Trump or President Biden, that the United States will manage issues with its partners on the basis less of consistent principles than of domestic political calculus. With the administration also demonstrating an interest in managed trade, in particular with China, over a multilateral framework that encourages open competition in international markets, Canada's positioning with its largest trading partners is made even more difficult. There is a need to step up advocacy for our interests in the United States while intensifying efforts to diversify our trade. As China contemplates joining the Trans-Pacific Partnership or CPTPP, there should be a hard-nosed assessment about whether, or not, China is prepared to seriously reform its trade-distorting domestic practices. If there are positive signals, Canada could support a decision by CPTPP members to open negotiations as a lever to test this determination and to re-set our own relationship with China.

Canada and the Digitalization of Money

As all of the above challenges are contemplated, the economy is also being re-wired through the continued development and application of networks, data, and automation and artificial intelligence. Banking and finance is a striking example of a sector that will require sustained investment in digitalization under an enabling policy framework. Cryptocurrencies are grabbing the headlines, but there is a deep current of change driven by fintech that can foster more competition and deliver benefits to households and businesses, small and large. Some initiatives, including a modernized payments system and open banking, can be realized soon. Down the road, a digital dollar issued by the Bank of Canada could become part of the financial landscape. Our previously published, Canada and the Digitalization of Money report takes stock of international developments in digital payments and money, reviews the state of progress in Canada and develops advice for policy makers, regulators and market participants.