Canada’s economy will grow at a reduced rate for the next 10 years because high household and business debt levels will act as a drag on the recovery from COVID-19, a new report says.
The report from U.K.-based Capital Economics predicts the economy will end the year 6.3 per cent smaller than before the pandemic, and will recover most ― but not all ― of that next year.
It also sees the country ending the year with 6.2 per cent fewer jobs, despite the wave of rehiring being seen right now as provinces lift their lockdown orders.
Watch: Canada reclaims nearly one million jobs lost to the pandemic. Story continues below.
Statistics Canada reported that the country added a massive 953,000 jobs in June as businesses reopened.
But the statistical agency noted that there were still 3.1 million Canadians who continue to be “affected by the COVID-19 economic shutdown.” That includes 1.8 million people who lost their jobs as well as those facing forced absences or reduced hours.
And it will take until 2022 for Canada to return to the pre-pandemic level of jobs again, wrote Stephen Brown of Capital Economics. Beyond that, the recovery will be slow, held back by already high levels of debt, the economist predicted.
“High private-sector (business and consumer) debt is likely to hold back productivity growth in the coming decade relative to that in the U.S.,” Brown wrote.
He predicts that Canada’s economy will grow at an average pace of 1.5 per cent per year in the coming decade, down from an average of 1.8 per cent in recent years. But he sees growth returning to its longer term trend after 2030.
Brown also expects Canada to keep running large government deficits in future years, though not as large as this year.
The federal government’s recent fiscal update forecast a deficit of $343.2 billion this fiscal year, equal to 16 per cent of Canada’s economic output. Brown expects that Canada will run another large deficit next year, but at around 7 per cent of economic output.
He sees Canada’s trade deficit widening, as imports pick up faster than exports. The demand for many Canadian exports ― such as energy ― is weak, while Canadian consumers are returning to normal spending levels.
“Accordingly, net trade will subtract from (economic growth) this year and next,” Brown wrote.