Monthly Economic Letter
Take advantage of new consumer trends for renewed growth
Economists expect a boom in household spending in post-pandemic period
Although recessions differ in their causes, magnitude and duration, one economic reality remains—the importance of consumer spending for recovery. Consumers are the main driver of the Canadian economy with consumption accounting for almost 60% of GDP.
In addition to the important role household spending plays in fueling an economic recovery, changing consumer behaviors also push companies to adapt and innovate. How will consumers behave after this crisis? And what will the impact be on your business?
Online sales are here to stay
With many businesses closing their doors to comply with government restrictions to combat the spread of COVID-19, online commerce has gained ground. In November, 7.7% of all Canadian retail sales were made online, compared to 2.9% in February before the first lockdowns were imposed.
Nearly 85% of Canadians buy online and, in a BDC survey conducted in January, 42% of respondents said they intend to increase their spending in the future. The convenience of e-commerce, including home delivery, service flexibility and time savings, are the main reasons driving these consumers to buy more online and they said they will continue to do so even after the pandemic. Yet, less than half of Canadian small and medium sized businesses plan to sell online after the crisis.
Of course, price will always be a key deciding factor for consumers, but the survey indicates that the ability to purchase a product or service online has become a selection criteria for 42% of consumers.
An online presence is now essential for all businesses. Besides e-commerce transactions, today's consumers also use the Internet to find information and compare product prices before making a purchase. Almost half of respondent to our survey said they believe getting information online is an important factor in their buying decision.
Other major trends
Other consumer trends are emerging and Canadian entrepreneurs have every interest in being aware of them. One of the most important of these is that a growing number of consumers want to buy products that are eco-friendly. Many consumers also want to buy local products from nearby businesses.
Household spending boom on the horizon
Companies that are able to adapt to these trends will be better position to benefit from a coming boom in consumer spending. Rising disposable income and increased savings by Canadian households will be reflected in part in the repayment of debt, but also in increased spending.
In the initial post-pandemic period, economists expect consumers to celebrate the end to long months of restrictions by spending with a vengeance before things return to normal. This phenomenon has already been observed in Australia where the pandemic is well-contained.
Once restrictions are lifted, businesses are open and consumer confidence is restored, the economy will recover quickly. Make sure your business benefits by adapting to new consumer trends now.
Canadian economy at a glance
The Canadian economy goes on pause
A winter slowdown as the country waits for vaccinations
Canada’s economic outlook darkened at the beginning of the year with an increase in COVID-19 infections and the emergence of virus mutations.
A new round of lockdowns is weighing on the recovery and hopes for a fast rollout of vaccination campaigns have been dampened by delivery delays.
A recovery put on ice for the winter
The good news is that the Canadian economy has been more resilient than expected. In November, GDP grew by 0.7%. This was the seventh consecutive increase in monthly GDP, but economic activity remains below its February 2020 level.
The slowdown has been particularly acute in the resource sector and in arts and recreation. The resource sector, which includes agriculture and forestry, declined 0.6% in November from the previous month, but this decline was not large enough to offset gains since the beginning of the recovery.
Food and beverage services continue to be in poor shape (-2.1% compared with October), but accommodation services (+6.0%) started to recover.
Employment still declining
The resilience of the economy in the face of the second COVID wave in the fall meant the labour market was spared from more damage during the last months of 2020.
However, the loss of economic momentum in the new year is being reflected in the employment data. Overall in Canada, 213,000 jobs were lost in January. Unsurprisingly, job losses are concentrated in the retail sector in Quebec and Ontario, where non-essential businesses were forced to close in January.
The worst year since the 1980s
Preliminary estimates from Statistics Canada project growth of 0.3% for December. This would be the weakest monthly growth since the beginning of the recovery. If these estimates are confirmed, economic activity would remain at about 97% of its pre-pandemic level and GDP would have declined by 5.1% in 2020—the worst performance in 40 years.
A year of recovery ahead
Until the pandemic is under control, economic activity will continue to be constrained. Thus, the path to full recovery depends on the vaccine rollout. At the time of writing, Canada had only administered 2.5 doses per 100 people, but herd immunity is still expected to be achieved towards the end of the summer.
While the first few months of 2021 are expected to be slow, the economy should begin to accelerate as early as this spring.
Employment declines in January are concentrated among lower wage earners, but the various government assistance programs are offsetting income losses and thus limiting the impact on household purchasing power. The investment intentions of Canadian businesses are also improving.
In line with what we observed last summer, once the restrictions on a sector are lifted, growth quickly recovers. As a result, we expect Canadian GDP to grow by about 4.5% this year.
What does this mean for your business?
- Fall data showed signs of economic resilience, but with increased health restrictions since then, a loss of momentum is expected to weigh on the economy this winter.
- The advent of new, more contagious variants and vaccine delivery delays further cloud the outlook. Local service sectors will likely remain constrained until at least the spring.
- Prepare your business for growth because once health restrictions are lifted demand should be robust.
U.S. economy at a glance
U.S. economy goes into the deep freeze
2020 saw worst performance in the postwar era
Preliminary growth estimates indicate the U.S. recovery faltered at the end of 2020. After rebounding 33.4% during the summer, the economy slowed in the fall with fourth-quarter growth coming in at just 4.0%.
This anemic increase reflects new restrictions and closures that took effect in some parts of the country to combat a new surge in COVID-19 infections.
Consumers are cautious
The pandemic has begun to limit the ability and willingness of households to spend. Consumer spending slowed in November (-0.7%) and December (-0.6%) as the virus gained momentum and forced the closure of stores and restaurants in many states.
Jobs and stimulus are still pending
An upward trend in the labour market also reversed in December. Employment gains in January in the financial and business services sector were strong enough to offset further job losses in the high contact service industries. On the net, the U.S. economy added 49 thousand new jobs last month. When passed by Congress, President Joe Biden’s proposed $1.9-trillion stimulus package is expected to help households sustain consumption in the first half of 2021.
Housing market continues to grow
Households have become more cautious about spending, but residential investment continues to perform well. Housing starts in December even surpassed the peak reached last February before the outbreak of the virus in the United States.
Residential building permits were 4.5% higher in December than in November, and 17.3% higher than the same period a year earlier. As a result, residential investment is expected to continue its upward trend. (Permits are a leading indicator of housing starts.) Canadian companies supplying the U.S. construction industry, such as the lumber sector, will continue to benefit from the brisk pace of activity.
A fragile recovery
A slower than expected vaccine rollout and restrictions across the country slowed growth at the end of 2020. This trend is expected to continue into early 2021 as the virus continues to spread and more contagious variants take hold.
However, the Biden’s administration’s stimulus package could mitigate the expected slowdown until herd immunity is achieved.
Ultimately, the health of the U.S. economy will obviously depend on the evolution of the virus, but much will also depend on consumer confidence—the economy’s driving force. For now, confidence indices continue to be lacklustre.
What does this mean for your business?
- The U.S. recovery is more fragile and consumers are more cautious. U.S. demand for Canadian goods and services will be more modest. If your company is selling to U.S. consumers, expect a slowdown.
- The impact of the Biden administration’s Buy American orientation remains unclear for Canadian companies at this time. However, if your company is doing business in the U.S., life could become more complicated in the near future.
- Manufacturers and other businesses that depend on construction, such as the lumber industry, should continue to benefit from the boom in housing starts south of the border.
Oil market update
Keystone XL shutdown is disappointing, but the worst is behind the Canadian oil industry
Prices rise and transport bottlenecks are set to ease
Oil prices continue to rise despite a surge in new COVID-19 cases that is darkening the global economic outlook. Closer to home, the shutdown of the Keystone XL pipeline project by new U.S. President Joe Biden dominated the industry’s attention.
After the Keystone XL shutdown, what about Canadian oil?
Over the past 15 years, the Keystone XL pipeline has had its share of starts and stops. Biden put the final axe to the project on his first day in office, reversing the decision of his Republican predecessor Donald Trump.
This is bad news for Alberta, where the provincial government invested $1.5 billion in the project last year. TC Energy has also announced more than 1,000 job cuts in Western Canada as a result of the shutdown.
Despite this setback, the worst appears to be over for western Canadian oil. While many of the industry's difficulties in recent years have been related to transportation bottlenecks, the situation will improve substantially with the completion of several other pipeline projects this year.
The Enbridge Line 3 Replacement and the TransMountain pipeline expansion will add 370,000 and 590,000 barrels per day (bpd) of capacity, respectively, by year end.
In addition, both Enbridge and TC Energy are planning to de-bottleneck existing systems to add an additional 100,000 bpd in the coming months. TC Energy also retains the right to increase exports through the existing Keystone Pipeline by 120,000 bpd.
These projects will bring Canadian pipeline export capacity to over 5 million barrels per day (Mb/d). This is a major improvement over the current export capacity of about 4 Mb/d, excluding rail transportation.
Moreover, in 2019, bottlenecks in existing pipelines led to a surge in oil transport by rail. Since then, companies have invested in their ability to export crude by rail, making this a viable option for producers now.
How will U.S. refineries react?
On one hand, Canada's capacity to refine its heavy oil is quite low. Canadian refineries can process around 600,000 barrels per day.
On the other hand, U.S. refineries, particularly those on the Gulf Coast, are better equipped to process Canadian heavy oil than U.S. light. These refineries import more than 5 million barrels heavy crude daily. It is possible that with the Keystone XL cancellation these refineries will turn to Mexico and South American countries for supply. Nevertheless, Canadian producers have managed to capture a significant share of the U.S. heavy crude oil market in recent years, despite the transportation challenges.
Although the evolution of the pandemic remains an issue for the oil market, demand from the United States is expected to pick up during 2021 as economic activity recovers.
In a nutshell...
The shutdown of the Keystone XL project demonstrates once again the impact of politics and demand uncertainty facing Canadian oil companies. The new U.S. President’s decision was first and foremost a symbolic gesture, and will have limited impact on the market. However, the Keystone XL cancellation was not a good sign for the future development of the Canadian oil industry.
Other economic indicators
Bank of Canada to remain on the side-line for a while
The Bank of Canada maintain the status quo on January 20. The overnight interest rate in Canada will stay at 0.25% and the Bank will maintain the pace of its quantitative easing program (at least $4 billion per week). It is unlikely that the Bank will differ from its current stand in the near future. As mentioned in the last rate announcement: “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”—which is not forecast until into 2023.
The loonie continued to rise in January
The Canadian dollar even exceeded US$0.79 towards the end of the month—the highest level in nearly three years. The loonie's momentum is largely explained by the continued depreciation of the U.S. dollar. Renewed risk appetite is leading investors to move away from safe havens such as the greenback. Rising commodity prices could push the loonie to appreciate further. The Canadian dollar is expected to remain below US$0.80 this winter and continue to support Canadian exports.
Renewed optimism among entrepreneurs
Although the majority of SMEs remain rather pessimistic about the economic outlook for the coming year, our most recent investment intentions survey shows that SME confidence is improving. The balance of opinion among entrepreneurs towards the Canadian economy is still in negative territory, meaning that a greater proportion of businesses predict an unfavourable economic environment for the next 12 months.
However, the proportion of more optimistic businesses increased by 34 percentage points between the last quarter of 2020 and the beginning of 2021. The arrival of a vaccine and the acceleration of vaccination campaigns have reduced the uncertainty associated with the pandemic since the fall of 2020, despite the increase in new daily cases and greater health restrictions across the country. This is the first time since the crisis began last spring that more entrepreneurs expect an increase in sales (38%) than a decrease in sales (25%) over the next 12 months.
Business credit conditions are even more accommodative
Credit conditions for Canadian businesses eased further during the month of January. Effective interest rates—the average prevailing borrowing rate for businesses on new loans—decreased by 5 basis points in one month. Rates for households were little changed at just over 2.5 per cent; the effective rate for businesses is now 2.16 per cent, a record low based on available data1. As many central banks, including the Bank of Canada, continue their extensive quantitative easing program, the demand for government bonds is increasing, resulting in lower government bond yields. Fluctuations in government bond yields are reflected in bank rates, so effective rates may continue to decline in the coming months.
1 Since 1999.