The COVID-19 pandemic, aggressive shift in monetary policy and political change in Washington have all made for an historic period. That said, the worst of the pandemic is presumably behind us as vaccines roll out across North America. The Federal Reserve will maintain exceptionally stimulative monetary policy well beyond 2021, as the central bank seeks to let inflation run above target in the near term. And, another dose of fiscal stimulus from Washington will be met by further spending measures from Ottawa in the year ahead.
Against that backdrop, U.S. economic growth is forecast to grow 6.5% this calendar year, after a 3.5% contraction in 2020. Growth numbers could look exceptionally strong after the first quarter as containment measures ease and vaccination becomes more widespread.
In Canada, early-year containment measures were meaningfully more restrictive in Ontario and Quebec, which has set the year off on a weak note.
Director and Senior Economist
BMO Capital Markets
But, Canadian growth will still clock in at 6.0% this year (after a 5.4% decline in 2020), in part because of a strong late-year handoff, and should similarly see growth accelerate after the first quarter.
Great Lakes-St. Lawrence economy to rebound strongly
As always, the Great Lakes-St. Lawrence region is a vital driver of North American economic output, employment and trade, accounting for roughly a third of combined Canadian and U.S. output, jobs and exports.
The regional economy is expected to rebound strongly in 2021 and, despite another wave of lockdown measures currently in place in some jurisdictions, that process is well underway. Real GDP in the region is expected to jump 5.7% this year, after a 4.5% contraction estimated for 2020. In a nutshell, the region saw a slightly shallower decline than the rest of North America overall, and will similarly see a more modest recovery.
Fiscal stimulus provides major support
Fiscal stimulus continues to provide a major support through the recovery. In fact, this pandemic provided a rare episode where household disposable income actually rose through a recession, thanks to massive government transfers in excess of 10% of GDP. In Canada, stimulus is expected to flow, albeit at a more modest pace, for the upcoming three years. In the U.S., the Biden Administration’s latest stimulus package will add another $1.9 trillion of stimulus to an economy already recovering quickly. More broadly, the Democrat sweep could bring prospective policy changes in the areas of immigration, education and health care along with some form of a Green New Deal. Together, these should counter the impacts of increased taxes on corporations and high-income individuals.
Auto sector benefits from consumer spending
The auto sector recovered swiftly from pandemic lows, with sales in the U.S. and Canada carving out sharp V-shaped recoveries. U.S. sales have settled in above 16 mln annualized units in recent months, consistent with pre-COVID norms. This in part reflects a dramatic shift in consumer spending into goods and out of services. In other words, as service spending (including travel) has been necessarily curtailed by the pandemic, spending on cars, homes, sporting goods and other durables has surged.
We suspect that these areas will moderate in the coming years as spending gradually gets redirected toward services once vaccination becomes more widespread—pentup travel demand will eventually be substantial. In the meantime, factory activity has come back relatively well, with North American auto production running at pre-COVID levels.
Housing sector exceptionally strong
The housing market is exceptionally strong on both sides of the border, as the pandemic has created new demand for larger suburban/rural properties, and mortgage rates probe historic lows. In the U.S., sales and starts are at decade-plus highs, while prices are accelerating the most since 2006 (and even faster by some metrics). While some pockets in the South and West are outperforming, the Great Lakes-St. Lawrence region overall seems to be keeping up with national trends.
This is a market that has quite a bit of room to run post-COVID, with valuations relative to income and interest rates still attractive, and demographic flows possibly getting a boost under the Biden Administration. In Ontario and Quebec, rural markets are surging, with prices up nearly 50% from pre-COVID levels in some pockets, while urban rents (namely in Toronto and Montreal) have come under pressure.
After the Federal Reserve and Bank of Canada each cut interest rates to their effective lower bound, we expect rates to remain unchanged well into the recovery—it could be 2022 before we see movement on this front.
The Bottom Line: The Great Lakes-St. Lawrence region’s economy was hammered by the pandemic, as no region avoided its grip. But, the downturn was slightly less severe than other areas, and the recovery is well underway. The combination of expansionary fiscal policy, highly-accommodative monetary policy and progressing vaccination sets the stage for a very strong expansion later in 2021—and the Great Lakes-St. Lawrence region will not be left out.