Executive Summary
Vaccine rollout is underway, but contagion remains an issue and confinement measures are still in place. Overall, Canada’s COVID-19 related fatalities on a per capita basis have been below those for the OECD as a whole and considerably below the most severely affected countries. As elsewhere, age has been the key vulnerability, with around 90% of COVID-19-related deaths among those aged over 70 years. Also, racialised minorities have had a higher risk of COVID-19 infection and mortality. The first wave of the pandemic was concentrated in Quebec and Ontario, but case numbers became more widespread in the second wave. The second wave has seen provinces and territories selectively extending and re-imposing limits on activity. Canada’s mass vaccination began in December, under a plan that envisages enough vaccine for every Canadian that wants one by September 2021. Some limits on activity are now being lifted.
Source: Our World in Data, as of 2 March 2021.
Those in low-wage jobs, notably young workers, women and racialised minorities have been hit hardest economically by the crisis, implying a potential widening of inequality. In addition, data confirm deteriorations in mental health during the lockdowns. Opioid-related harms and deaths have risen sharply.
Canada’s economy made a rapid partial rebound from the spring 2020 confinement but has since slowed. Output dropped by more than 15% in the first wave of the pandemic, and the rate of unemployment spiked up to nearly 14%. The initial rebound in economic activity was rapid, but the pace of growth has since diminished. Activity in the travel, leisure and entertainment sectors remains well below pre-crisis levels. Output shrank by 5.4% in 2020.
Risks and uncertainties remain large, notably around how quickly restrictions can be lifted as vaccine rollout proceeds. There are also upside and downside risks in how rapidly households will unwind precautionary saving. Volatile global energy prices have discouraged oil and gas investment. On the upside, the expected fiscal stimulus in the United States could bring a large boost to Canadian exports.
OECD projections envisage annual output growth of around 4.7% in 2021 and 4% 2022. This will bring output close to pre-crisis trends and drive falls in the rate of unemployment. Headline consumer-price inflation will be affected by energy prices in the near term, core inflation will pick up gradually.
An ultra-low policy rate and other monetary measures continue to provide substantial support for the economy.
The Bank of Canada cut its policy rate to 0.25% in the early stages of the crisis. The Bank’s forward guidance on the policy interest rate, reinforced by its purchases of government securities, have eased borrowing conditions for households, firms and governments. Dissipating risks on some fronts have allowed the Bank to withdraw some liquidity support introduced at the beginning of the crisis. The upcoming 2021 renewal of the inflation-targeting regime provides an opportunity to adapt the Bank’s monetary policy framework to achieve its 2 % inflation target, over time, and maintain well-anchored inflation expectations in the context of persistently low global policy interest rates and risks to real-side recovery.
House prices have been increasing since late spring, when easing of the initial round of containment measures began. Household debt (especially in the form of mortgage borrowing) remains high, but debt service is less onerous. Low borrowing costs may also be amplifying already substantial high-risk corporate bond funding.
The priority should be to ensure fiscal policy provides the best assistance for households and businesses to recover from the crisis. Canadian governments have acted on a broad front to bolster demand and assist both households and businesses. Federal government measures have accounted for most of the fiscal response, which has been substantial. Prudent fiscal policy in recent years has helped provide scope for the large stimulus.
A high priority on fiscal support should remain while the economy is fragile. Crisis-related fiscal support can be withdrawn as the economy recovers. Nevertheless, a clear and transparent roadmap for preventing a spiralling public debt burden is needed.
A fiscal roadmap would help accommodate the need for additional resources in certain areas of public spending. Solutions to the gaps in socio-economic support and shortfalls in health care revealed by the crisis are likely to require additional resources for the longer term. Furthermore, the ageing-related spending pressures present before the pandemic will continue. Accommodating these fiscal demands in the medium and long term should be met through either savings in public spending elsewhere or tax increases.
Source: OECD Economic Outlook 108 database; and Statistics Canada.
There is scope to re-orient the tax system in ways that would bring structural improvement and generate some additional revenue. In particular, Canada’s environmental tax revenues are smaller relative to GDP than for most other countries. The carbon price floor needs to steepen if Canada is to meet its official commitments. Recent federal government proposals for carbon-price increases announced as part of a strengthened climate plan are encouraging.
Many businesses continue to struggle, and the crisis is accelerating structural change in demand and business operations. The federal government should be prepared to step in with further measures to help businesses. Schemes offering them credit are welcome, but encouragement of other forms of financing and improvement to insolvency procedures should be considered.
Non-tariff barriers arising from inter-provincial differences in product, service and labour market regulation continue to hamper business activity. With respect to broadband services, there are longstanding concerns about the strength of provider competition, and provision for rural and remote households, notably for Indigenous peoples, remains a challenge. Canada scores well in international indicators of domestic corruption. However, its property register system is often exploited for money laundering.
A more structured policy approach to well-being would help Canada achieve a resilient and healthy post-COVID economy and society. The federal government is exploring how to incorporate a comprehensive dashboard of quality-of-life measurements into decision-making and budgeting. Many countries are using such dashboards, including indicators of individuals’ current and future well-being and, often, measures of social inclusiveness and environmental sustainability. Canada is in a strong position to develop such a dashboard. It has good data on measures of well-being and has experience in integrating some dimensions of well-being into policy through its Gender Based Analysis Plus (GBA+).
Once agreed following public consultations, the dashboard should be hardwired into budgeting so as to ensure that all government ministries and agencies base their economic and social policy reforms on the same criteria. A key choice is whether to use the dashboard solely for budget policy changes or whether to apply it across the entire tax and spending baseline, as well as for regulatory impact and cost-benefit analyses.
COVID-19 has brought to light shortfalls in Canada’s elderly care and welfare support. The initial wave of the pandemic saw around 80% of COVID-19 fatalities in long-term care facilities and retirement homes. In addition to highlighting challenges in containing the virus, this revealed broader problems in the quality of long-term care. The pandemic also revealed resource issues for public health services and has underscored the downsides of pharmaceuticals not being included in national public health coverage and Canada’s limited provisions for sick-leave compensation.
The crisis has increased the prominence of a number of socio-economic challenges. Canada’s gender wage gap for full-time workers is almost 5 percentage points above the OECD average. Addressing this would be helped by further progress in improving access to affordable childcare so that women can pursue fulfilling careers more easily. In addition, a wider problem of weak backing for those unemployed or experiencing poverty remains, despite the recently implemented National Poverty Strategy.
Housing affordability and homelessness are key issues. The prolonged low-interest environment has contributed to increases in the price of housing. Social and other forms of affordable housing are limited, and waiting lists are long. The policy initiatives underway are welcome, but more could be done.
Indigenous peoples remain underprivileged in most socio-economic dimensions, including income, employment, security, housing, life expectancy and physical and mental health. Some progress has been made in empowering their governments, including through a distinctions-based approach that makes greater efforts to tailor policy to each of the three Indigenous groups, First Nations, Métis and Inuit. However, a further strengthening of self-determination is needed, as are more resources to eliminate gaps with other Canadians.