Will Herd Immunity Help Stimulate the Global Economy?

June 29, 2021

Getting as many Canadians vaccinated has everything to do with getting the country's economy back on track. This was the key statement Peter Hall, VP and Chief Economist shared during Export Development Canada’ webinar, 2021 Global Economic Outlook: Road to Recovery.

When asked by moderator Andrea Gardella, principal economist with EDC, why the world’s vaccination rates matter, Hall said getting the economy back on track is all about herd immunity.

“It’s the clearest sign of a fulsome return of the economy. This is setting us up for very near-term growth,” said Hall. With more than 20% of Canadians who have now received their second shot and millions of more doses on their way, things are looking up. The second half of 2021 is expecting to see the largest economic rebound with Hall calling it the “magic trigger moment”.

In the United States, they have seen two-thirds of their economy return to near pre-pandemic targets, but that still leaves a crucial third facing the biggest hurdles to turn things around. The stimulus cheques that were handed out in March combined with President Biden’s $1.9 trillion Covid stimulus plan should provide some assistance. “Growth is explosive in the US with Biden’s latest plan. There is no economy more powerful than the US economy,” said Hall. 

But just like a shaken bottle of pop, there is a lot of pent up demand by both Canadian and American consumers who are ready to spend the money they saved in the last 15 months.

“When it comes to consumer activity, housing, and business investments, all stops are getting pulled out and things are roaring ahead in a big way,” said Hall who said growth will be redlining in the next six months.

The pent-up demand from consumers equates to a whopping 15% of the US GDP.

“If it was all unleashed immediately into the economy, if everyone was feeling good and going back to concerts and repairing their cars, boom; that cash washes into the economy. But can the economy handle it when that happens?” Hall asked.

The best way to handle the economy coming back would be for it to feather back in instead of being unleashed all at once, he added. “Businesses that are ready for growth are the ones who will be able to capitalize on it best,” said Hall.

Globally, China’s recovery came sooner than other countries while India, Indonesia and Brazil are still not out of the woods yet. “The concern shifts to those countries who are struggling to get out of the pandemic. Everyone realizes this is a global community and we need to optimize around that,” said Hall.

Now that the United States has plateaued in their vaccine uptake, providing vaccinations to the rest of the world will be key to providing assistance to other countries. American protectionism is not a new idea and fortunately the concept is not as bad as it was 11 years ago. These ideas of global protection spread like a contagion Hall cautions. When countries create stimulus programs and they are building walls around their economies, it makes it challenging to get everyone’s economy back online again.

Hall says turning the economy back on again is a much more challenging business decision compared to turning the economy off which is a political decision. There are lots of moving parts including the labour pool that may be hesitant to return to their office towers, said Hall.

When it comes to inflation, Hall is expecting to see between 3 to 5% price increases as businesses continue to pad their contracts six months out. The sectors that were the most resilient included the agricultural sector as we all witnessed the great demands for various grocery items, said Hall. “We are a huge net exporter of everything along the agrifood continuum. We are doing well in this sector and there is no indication it will slow down,” he added.

The wood products sector also had a banner year as those confined to their homes found opportunities. There was a housing boom; renovations were up, and this put extra pressure on commodities. While no surprise, the financial sector was the third area that had the most resilience during the past year.

On the other side of the spectrum it was the tourism, arts, and entertainment industries that saw the biggest losses. The accommodation and food sector, which includes hotels and restaurants, have small margins, and as a result, they saw the biggest challenges.  “They were trying to deal with amortization on substantial assets and with no cash flow, they were very dependent on government stimulus,” said Hall.

As we are already seeing, Air Canada and WestJet are offering deep discounts as they try to lure their customers back. “Travel and anything related will be a fast growing area,” said Hall.

Now that the pandemic has helped to mobilize so many businesses, robotics, and the use of Artificial Intelligence (AI) will continue to be the way we do things.

“Once you get an efficiency into a business, you have learned something new about how you can do business and how much more profitable that can be,” said Hall who added that periods of crisis see the most innovation as well as a diversifying of the economy.

The American economy is sitting at 6.3% positive growth when it comes to GDP and Canadian economists are tossing around 7%. Conservative estimates for the remainder of the year sit at 5.5% for 2021 and 4.1% for 2022. The Canadian dollar is also estimated to be worth north of 80 cents American both this year and next. Heading into 2022 and 2023, Hall expects a high of 70 cents again for the Canadian dollar.

For now Canadians can continue to enjoy both the benefits of a recovering economy, and the freedoms that increasing vaccination rates across the country are providing. Maybe we can look forward to a (nearly) normal summer after all.