Bennett Jones Fall 2021 Economic Outlook: Closing the Investment Gap

Economic activity and employment in Canada and in advanced economies continue to show a rapid, vigorous recovery. In a normal business cycle, businesses would now be stepping up plans to hire, to invest and to take advantage of the rebound of demand globally and domestically.

To some extent, this is happening. In fact, employment in Canada has already regained its-pre-pandemic level. However, there are near-term uncertainties and pressures.

The greatest uncertainty is the future evolution of the pandemic and its potential impact on the economy. There is public fatigue in continually adapting public health measures, the activity of daily life and the workplace to counter COVID and its variants. Yet, businesses have no choice but to be prepared for different scenarios in conducting and planning their activities.

Discussions in boardrooms across the country and globally are also complicated by widespread experiences of supply chain disruptions, cost pressures, questions about the future path of interest rates, labour shortages and a changing workplace and tensions in the geo-political and trade environment. Businesses have to be clear-eyed about all of these realities and risks.  

Still, underlying market dynamics, including strong consumer demand domestically and in the United States, with tapered but still significant support from monetary and fiscal policy authorities, provide a foundation for confidence and investment.

Our outlook is based on an assumption of continued progress in containing the pandemic in Canada and globally.  

It reflects our judgement that:

• global supply bottlenecks should diminish and be largely gone by the beginning of 2023, inflationary pressures more persistent than expected, inflationary expectations will stay anchored, and there will be no price-wage spiral;
• the economy will continue on a path of recovery. For the United States, on a fourth-quarter-to-fourth-quarter (Q4 to Q4) basis, GDP is projected to grow by 3.4% in 2022, and 2.0% in 2023;
• the Federal Reserve is expected to terminate quantitative easing (QE) in the first half of 2022, perhaps as early as the first quarter, and later raise the Fed funds rate from 0.25% currently to 0.75% by the end of 2022, and to 1.75% by the end of 2023; 
• the Canadian economy is projected to grow robustly in the near term, before gradually decelerating to a rate close to potential by the end of 2023. Real GDP would grow 4.6% during 2022 (Q4 to Q4) and 2.3% during 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;
• the public and private sectors in Canada have to accelerate the response to three structural developments that are even more compelling today that when we entered the pandemic: population ageing, digitalization of the economy and climate change;
• the scope, scale and complexity of the task ahead for Canada to grow incomes per capita over the medium to long term cannot be overstated, as the path to meet or even come close to Canada's targets a deep transformation of the economy, with a significant portion of the effort to be front loaded;
• there is no scenario for sustainable growth that does not require an extraordinarily rapid, and durable, ramp up of public and private investment.   This is do-able, but must start now;      
• the large majority of the investment in sustainable growth will have to be led by the private sector on the expectation of a competitive financial return; and
• economic and trade policy must be squarely focused on this critical challenge for Canada. To grow the economy, to fund the investment, and to secure long-term prosperity, we cannot simply consume, import, and borrow.  

Our Economic Outlook is clear that to grow our economy sustainably over the long term will require exceptional collaboration between the public and private sectors, within the frame of a growth strategy.