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Stronger economic and political ties with the U.S. point to Canada’s fastest rate of economic growth in decades

April 16, 2021

Authored by RSM Canada LLP

Edwin P. Reilly, CPA, CA shared this article

NEWS RELEASE

Toronto,

RSM Canada ("RSM"), the leading global provider of audit, tax and consulting services focused on middle market businesses, today launched its April 2021 edition of “The Real Economy: Canada” – a quarterly report that provides Canadian businesses with economic analysis and insights into factors driving growth, or economic headwinds, in Canada's middle market.

In anticipation of Monday’s federal budget announcement, the second edition of this year’s ‘The Real Economy: Canada’ report examines how the economy has responded to aggressive federal spending and monetary policy, and to indirect measures such as the Biden administration’s American Rescue Plan, which is proving to be a spark for growth north of the border. The report also shines a light on the harmonizing effect of Canadian Pacific Railway’s recent $25 billion acquisition, the technological progression of Canadian industries over the past year and the path forward for a struggling Canadian labour force.

Key findings in this quarter’s report include:

Canada’s economy boosted by Biden administration’s $1.9 trillion American Rescue Plan
  • American stimulus cheques will help unleash consumer spending, which has been closely tied to Canada’s economic growth over the past few decades.
  • Reports show Canada’s GDP will benefit from U.S. stimulus package more than any other economy, indicating that further North American economic integration is both inevitable and mutually beneficial.
  • Government spending and aggressive monetary policy have helped Canadian economy recover 90 per cent of the economic output lost as a result of the pandemic.
Canadian Pacific Railway deal represents thaw in North American trade tensions and major step towards an integrated continental economy
  • Canada’s auto, manufacturing and agriculture sectors stand to gain exponentially from this integration of the continent’s global supply chain.
  • Canadian middle market firms now have opportunity to get their goods to market in a cheaper, more environmentally friendly manner.
  • Spike in oil-by-rail from Canada to U.S. in 2021 likely due to greater energy demand from stronger U.S. economy and Keystone XL pipeline cancellation.
Canada’s GDP still undershooting pre-pandemic projections, though productivity is on the rise
  • Canada’s output gap – which is the difference between actual GDP and the economy’s pre-pandemic projected GDP – is a 5.1 per cent deficit as of December 2020.
  • Pandemic has likely hastened diversification of North American economies toward technology and advanced manufacturing, with productivity rising in industries that are more technologically oriented.
  • Increased manufacturing and technology production will end up supporting downstream service-sector activity and household consumption, particularly once the vaccine has been broadly distributed.
Canadian labour continues its slow climb back to pre-pandemic levels
  • Unemployment rate of 7.5 per cent implies a labour market with a long road back to reaching its full employment potential.
  • Prioritizing job retraining would help alleviate concerns of labour force exposure to job automation.
  • Delayed entry of young Canadians into the work force, 60 per cent decline in immigration represent lingering problems for labour long-term.
Municipalities unwilling to increase taxes to address plummeting revenues, but this may change
  • Model suggests COVID-19 will decrease cities’ own source revenue by around 15 per cent, from $112 billion in 2019 to $94 billion in 2020.
  • The revenue shock requires an assessment of how municipalities are financed moving forward.
  • Doing so will support municipal modernization efforts, which will be critical to driving efficiencies.

“Canadian Pacific’s $25 billion deal to purchase Kansas City Southern marks a significant move toward easing tensions among North American trading partners this year and fulfilling the vision of an integrated North American economy,” says Alex Kotsopoulos, partner, projects and economics with RSM Canada. “In the near-term however, current levels of unemployment in Canada point to a labour market that is struggling to reclaim its full potential, while the current revenue shortage of municipalities and Canada’s output gap –  defined as the difference between actual GDP and the economy’s pre-pandemic projected GDP – suggest more action is required by the government.”

Joe Brusuelas, chief economist with RSM US LLP, added: “Buoyed by government spending and aggressive monetary policy, the Canadian economy has recovered nearly 90 per cent of the economic output lost as a result of the pandemic, setting the stage for what is expected to be Canada’s fastest rate of growth in a generation. While the federal government’s upcoming budget will attempt to accelerate recovery, it is the American Rescue Plan that, when combined with Canadian relief efforts, will lift the economy out of its slumber. Payments being sent directly to Americans will unleash consumer spending, which in turn will fuel a robust expansion this year and next. Canada’s economy will benefit as a result.”

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