Canada should experience post-covid growth in the second half of 2021, says the OECD.Click image to enlargeThe Canadian economy will rebound strongly and grow by 6.1 per cent in 2021 and 3.8 per cent in 2022, according to the latest report from the Organisation for Economic Co-operation and Development (OECD).

The OECD says growth will be spurred by reduced COVID-19 restrictions in the second half of this year and buoyant external demand.

While every labour market in the country is forecast to experience a recovery, OECD expects output levels will remain below trend and underlying inflationary pressures will be contained. Because of this, the group says government support for businesses and households experiencing revenue and income losses should remain available until economic recovery is well underway.

Economists at the OECD says monetary policy should remain accommodative, accompanied by a close watch on housing and corporate debt, with further reduction of quantitative easing when conditions warrant them. 

Economic activity more resilient than expected

Output growth has held up during the pandemic, with real GDP increasing by 0.4 per cent and 0.9 per cent (month-on-month) in February and March. Vaccinations, fiscal stimulus, higher prices for oil and other commodities and expectations of a significant U.S. fiscal package in March are boosting the recovery, says OECD, which is consistent with the positive business sentiment suggested in the Bank of Canada’s Business Outlook Survey.

Substantial Monetary and fiscal policy support

The Trudeau government’s policy stance remains accommodative and the budget for 2021 commits to maintaining support for households and businesses, including the Canada Emergency Wage Subsidy and the Canada Recovery Benefit. New supports include an additional wage-bill subsidy, the Canada Recovery Hiring Program. The Budget estimates the federal fiscal deficit at 6.4 per cent of GDP for the fiscal year 2021-22.

Economic growth will accelerate

While growth in the second quarter of 2021 will be tame, OECD predicts a pick-up as vaccination progresses and lockdown measures are lifted. This will boost consumer spending and labour market conditions. Exports will benefit from additional demand arising from the US fiscal package. An interest rate increase will likely come in the final quarter of 2022.

Risks

Despite the improving economic outlook, The OECD report warns that risks remain elevated. The emergence of highly contagious virus variants requiring renewed restrictions threatens the pace of economic recovery.

While the US fiscal package will undoubtedly boost demand for Canadian exports, the scale of the effect is unclear.

Even with these risks, Budget 2021 should improve the environment for business, including efforts to further lower domestic trade barriers.

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