Pent-up demand expected to explode as consumers prepare to spend again after more than a year of COVID restrictions
Peter Hall has been taken to task for his rosy 2021 global economic outlook and he has the scars to prove it.
“I’ve got war wounds all over me,” said the chief economist of Export Development Canada.
But he is standing by his forecast calling for a “very robust” 6.4 percent growth in global gross domestic product this year, up from a 3.5 percent contraction in 2020.
In fact, he expects to be revising those numbers higher in the next official forecast.
“We realize demand is a lot stronger than we’ve given it credit for,” Hall told clients attending a recent EDC webinar.
He considers the growth in 2021 to be “baked in” and is now more focused on getting 2022 right.
“This really isn’t optimistic. It’s realistic,” said Hall.
The preliminary forecast for 2022 calls for a 5.4 percent increase in global GDP.
The United States is the engine that drives the world economy.
U.S. GDP in 2021 is expected to increase by 6.3 percent, although he suspects that number will likely soon be revised to higher than seven percent.
“There are very few signs of anything getting in the way of what looks like a juggernaut in the lower 48 just south of our border here,” said Hall.
“That’s very good news for Canada.”
The U.S. is Canada’s top trade partner, accounting for about three-quarters of total exports.
American citizens started receiving cheques from President Joe Biden’s US$1.9 trillion COVID stimulus bill in March.
But there was already plenty of private stimulus in the economy caused by pent-up demand that existed prior to COVID and continued to build throughout the pandemic.
“The majority of people still hung onto their jobs and were still getting a full-time income dripping into their bank accounts over this period of time with far less to spend it on,” said Hall.
That has resulted in bulging bank accounts. Savings in the U.S. in 2020 amounted to more than 15 percent of the country’s total GDP.
He expects those savings to “wash into the economy” in the second half of 2021 as people go on vacations, attend sporting events and concerts and start dining out in restaurants.
The same pent-up demand will soon be unleashed in Canada. The country is leading all G20 nations in first dose COVID vaccinations, although it is lagging in second dose vaccinations.
“That is the greatest news we can share with everybody around the table today,” said Hall.
EDC is forecasting 5.5 percent real GDP growth for Canada in 2021.
North America is ahead of the game with that pent-up demand already starting to materialize. Growth in the European Union will be lower at an estimated 4.3 percent, which is still good.
Emerging countries are expected to register strong growth with China leading the way at 10.8 percent.
India is a region of concern because of a deadly second wave of COVID. However, the country has secured two billion vaccine doses that will be doled out between August and December.
Canada’s agriculture sector was one of the segments of the economy that fared the best during the pandemic.
“We don’t see an end to that really. There is no pullback that we see going to happen,” he said.
The expanding middle class in emerging economies will continue to drive growth in meat and feedgrain demand.
Interest rates will eventually start to rise. The Bank of Canada recently said it will hold rates where they are until “economic slack is absorbed” and a two percent inflation target is sustainably achieved.
It believes that will happen sometime in the second half of 2022. Hall agrees, although he said there is a “substantial and growing risk” of persistent inflation.
The Bank of Canada is reining in its quantitative easing program with weekly net purchases of government bonds reduced to $3 billion starting April 26, down from $4 billion prior to that.
The Canadian dollar is expected to remain above US80 cents this year and next year, said Hall.