Thought of the Day - December 20 - By the Numbers

This week I am changing it up. Instead of COVID itself, let's have a look at the Canadian economic data. While I have no background in economics I figure I would still try to crystal ball 2021 from an economic standpoint just to get you thinking.

Employment: The unemployment rate has continued to improve month by month.

However, it is unlikely this will improve much into the new year, probably remaining in the high 8s - it will certainly not return to the mid-5% enjoyed at the beginning of 2020. BC has been doing slightly better than the national average with unemployment expected to improve to around 6.5% in 2021.

Inflation: The CPI index is based on a basket of services:

• Food—groceries and prepared meals;

• Shelter—rent and mortgage costs, insurance, repairs and maintenance, taxes, utilities;

• Transportation—vehicles, gasoline, car insurance, repairs and maintenance, public transit costs;

• Household expenses—phones, internet, child care, cleaning supplies;

• Furniture, Appliance and Apparel (including jewellery and dry-cleaning);

• Medical and Personal Care—prescriptions, dental care, eye care, haircuts, toiletries

• Sports, Travel, Education and Leisure;

• Sins - alcohol, tobacco and recreational cannabis

While inflation has been fairly low the past couple of quarters, there are a number of indicators this will not be as low in 2021. Specifically:

• Food: It is projected that food prices - especially fresh produce and meat will take a jump, as much as 6.5%;

• Shelter: Rental costs: Except for some specific sectors/jurisdictions the increases in municipal taxes/utilities, house prices, the removal of freezes in rental prices, increased maintenance costs (significant increases in building materials, mostly due to supply-demand imbalances - for example a 2x4 (stud) that had a retail cost about $2 last year is now over $5). Thus we are likely to see an increases in urban rental costs. Home Ownership: While the same applies to home ownership when the cost of mortgages are included it appears this basket item is stable;

• Transport: This cost has dropped somewhat: work from home, lower energy prices, insurance rebates;

• Household, furniture, apparel, medical and personal care - should all be fairly flat;

• Sports, Travel, Education and Leisure: While these are all going up in price, spending on these items has dropped off sharply;

• Sin Taxes: Alcohol, tobacco and cannabis taxes are likely to increase a little in 2021.

All and all these items will move annual inflation from under 1% this year to closer to 2% in 2021.

Economic Growth (GDP):

In Q3 about half of the GDP reduction from Q1 & Q2 had been regained, the forecast is a growth of 4.3% in Q4, and so we should end the year down about 2% (remember if the economy shrinks by 50%, then grows by 50% you are still only at 75% of the rate at the start). As the economy was expected to grow by over 2% this year overall we are still down about 5% below projections. Recovery momentum will continue into 2021. We will probably experience a reasonable annual growth of about 2.7% next year. BC is also ahead here as well, with a GDP forecast of 4.9% for 2021, driven by energy and transport mega-projects, and improvement in the lumber industry (as noted under Shelter CPI).

Exchange Rate: The Canadian dollar, when compared to the USD, has gained ground this year. But it is expected that this small improvement is spending power will be given back in 2021 as the US economy outpaces Canada's.

Stock Market: The main Canadian stock market (TSX) has almost regained the massive sell-off seen at the end of Q1, when the full impact of the pandemic was realized here in Canada.

However in 2021, despite continued federal subsidies, the market is expected to lose about 1,000 points. Thus Canadian investors are looking to round-out there portfolios with more foreign stocks, particularly with countries in Asia-Pac that were far less severely affected by COVID and thus more likely to see real growth in 2021.

Consumer Confidence: While largely subjective, consumer confidence is extremely important in continuing spending in the stock market and consumer consumption, needed to the keep economic engine (dare I say ponzi schemes) working.

Following a rapid reversal of the significant downturn at the beginning of Q2, for the last couple of quarters consumer confidence has gained very little. It is expects that consumer confidence will continue to improve slowly through 2021, returning to Q1 2020 levels by the end of the year.

Taxation:

• Federal: There has already been talk about increased GST, addition of a "vacant home" tax, the introduction of a "wealth-tax", and new "incentives to unlock savings". That said, with the Liberals not having a majority they have little room for significant increases, thus the reason to try to secure a new mandate before attempting to address the massive budget gap (politely known as our deficit) - oh by the way, if you are looking for a career change the CRA is hiring;

• Provincial: With a number of provinces having held elections in 2020, there will be significant increase in taxes, and crown-corporation fees, at the provincial level. In BC's lower mainland I expect this overall to be in the order of 5%;

• Municipal: With a few notable exceptions, cities in Canada have to strive for a balanced budget, thus increased costs or shortfalls of revenue will be made up through additional taxation. Here in the lower mainland a 5% increase will be commonplace (it has been reported Vancouver city would need to increase by 12% in 2021 to balance their past largess - but this will probably not come to be in 2021).

Conclusion: While a number of people/sectors/companies will do well in 2021, in general sector-specific unemployment, erosion in spending power and limited domestic investment returns, will be a fact of life in Canada in 2021. That said, the real elephant in the room, against the backdrop of COVID, is how the delicate balance in government spending, debt servicing and taxation will be handled. This could have a significant effect on the Canadian economy - landing somewhere between business-as-usual and the-great-reset.

Cheers

Cliff