Base year effects – The dramatic economic impact of the COVID-19 pandemic will make it more challenging to track economic indicators and interpret their meaning this year. Many indicators are expressed in year-over-year growth, and there were sudden and sharp changes in these indicators last year. The timing and direction of last year’s changes will have to be taken into consideration when interpreting this year’s indicators.
Economic growth – Canada’s economy is benefiting from increased global demand for a number of commodities, such as lumber, steel, and agricultural products. This has resulted in the Canadian dollar trading near or above 80 cents US since mid-March. This means that $1 Canadian is worth about $0.80 US. The IMF has forecast real economic growth in Canada will be 5.0 per cent this year, a prediction that remains dependent on continued rollout of vaccinations and other measures preventing a fourth wave. The commodities boom is highly regionalized. Strong growth in some sectors, and the resulting increase in the value of the Canadian dollar, will act as an economic drag in other regions. Government stimulus plans should take this return to a two-speed economy into account.
Jobs – Employment for higher-wage workers has returned to pre-pandemic levels, but remains significantly lower for low-wage workers, especially those in highly affected industries like hospitality, tourism, and food services. Long-term unemployment has increased dramatically, as more than half a million people have been without work for 27 weeks or more as of April 2021.
Wages – Wage indicators have also been slightly misleading during the COVID-19 pandemic. Since job losses have been concentrated among lower-wage workers, average wages are higher, but only because there are fewer low-wage workers employed. Public sector employers are likely to be especially reluctant to move on wages, but private sector employer organizations are already talking about labour shortages, which is more likely an issue with the low wages on offer. As prices for food and shelter are continuing to rise, it will be especially critical for workers to stand firm on the need for real wage increases.
Inflation – Overall inflation is starting to pick up, but it remains to be seen how much of the price pressure is temporary and how much is permanent. Base year effects – comparing the current year to highly variable price levels from last year – make interpreting inflation indicators more complicated. The overall Consumer Price Index (CPI) for April 2021 was 3.4 per cent, higher than the Bank of Canada’s target, but this is only because of base year effects. The Bank calculates three alternative variations, CPI-trim, CPI-median, and CPI-common, and all three of these remained between 1.7 and 2.3 per cent for April, indicating that there is still sufficient room for governments to make critical infrastructure investments without stoking excess inflation.
Interest rates – The Bank of Canada has indicated that it expects to keep its key lending rate at 0.25 per cent through to the end of 2022. This means that rates might start to increase earlier than previously expected. Government borrowing remains affordable, with 30-year federal government bonds selling at 2.0 per cent interest.