Canada’s Economy Not Out of the Woods Yet

by Sri Thanabalasingam

The Canadian economy entered 2021 on precarious terms. The spread of COVID-19 was accelerating and provinces were responding by tightening restrictions on “high-touch” industries (i.e. businesses that require higher levels of contact such as restaurants, gyms, and other recreation services). This led to a pullback in consumer spending, increased layoffs, and a likely stalling of overall economic activity to end 2020.

January was not much better. Large provinces either extended or imposed tougher measures, contributing to more than 200k job losses for the month, with the retail sector especially impacted. Retail employment fell by 160k last month, and Ontario and Quebec accounted for almost all of the decline. In addition to the economic turmoil, the vaccine rollout was struggling to get off the ground. Logistical issues caused significant delays, and Canada was facing near-term supply shortages of the approved Pfizer and Moderna vaccines. While these issues appear to have been resolved recently, uncertainty will persist until the vaccines are inside the country.

At the current juncture, with daily cases, hospitalizations, and deaths trending down, provinces are gradually relaxing restrictions on the economy. Already, consumers are flocking to businesses that recently reopened. High frequency indicators such as credit/debit card spending data, and restaurant reservation data show stark improvements among provinces which have eased health protocols. This is constructive for Canada’s near-term outlook, but the presence of more contagious variants of the virus, means we’re not out of the woods yet. It will take a speedier deployment of vaccines alongside continued public health measures to get us to the other side of this pandemic.

Despite despair all around, Canada’s housing market has been unperturbed and unrelenting. Home sales and prices reached record highs in January. Compared to a year ago, existing home sales are up 46.2%, and prices are 22.8% higher. Several factors, including low mortgage rates, race for space, and a fear of missing out, are likely driving these advances. At some point, the frenzy will die down and rising rates, limited supply and diminished affordability will cool the market. As of now however, there’s no clear indication of a slowdown in housing activity.

Sri Thanabalasingam is a Senior Economist at TD , and serves on the Board of Directors for Tamils in Finance.