Canada’s economy may need a decade to fully recover

According to Capital Economics, growing household and business debt will slow down the anticipated strong economic recovery after COVID-19.

“High business and consumer debt level will probably restrain productivity growth during the next ten years compared to the US,” – noted Stephen Brown, senior Canada economist at Capital Economics.

Unlike many other optimistic experts, the new report by Capital Economics expects the GDP to end the year by 6.3% lower than before the pandemic.

“We predict a 5.5% rebound in 2021, which means it will stay below its pre-virus level until the start of 2022,” – Brown said. “The federal budget deficit will remain large and we believe the Bank of Canada will keep buying assets for at least another 12 months.”

The longer slowdown and its potential influence on most Canadians’ purchasing power will keep an annual economic growth at an average of 1.5% for the next ten years or so. It’s significantly lower than the long-term average of 1.8% seen over the previous few years.

In addition to it, Capital Economics expects a sharp 6.2% decline in jobs by the end of this year, which will offset all the gains from the last few months.

As you know, tomorrow the central bank will announce its rate decision and release a quarterly Monetary Policy Report. With the Bank tending to keep the rates low in attempt to soften the damage from COVID-19, it’s quite unlikely that we’ll see a rate change this time.

Michael Gregory, deputy chief economist and head of U.S. economics at BMO, says we’ll need the combination of several positive factors for the Bank to raise the rate: low inflation, a lower output gap, and a great improvement of employment situation.

“I really don’t expect the rates to change for at least 2-3 years,” – he added.