Green Shoots of Spring Economic Outlook March 2021 Table of Contents

Green shoots of spring Economic outlook March 2021 Table of contents

Outlook summary

Canada’s current recovery

International outlook

Canadian outlook

Industry overview

Assumptions and risks

Concluding remarks

Appendix

• Table: Key economic indicators

• Table: Financial market indicators

The past year has been tough, for Canada and the rest of This year is shaping up to be an auspicious one for the world. We have experienced a public health and households. The Bank of Canada has reiterated its pledge economic crisis unlike anything in generations. The good to keep interest rates low for awhile, making current and news is that the worst of the COVID-19 pandemic appears new debt much more affordable. Plus, the public health to be behind us. measures that kept many of us home for much of 2020 led to a surge in savings that was simply unprecedented. Spring is typically a time for renewal, and this year’s is Canadian households saved a stunning $211 billion last bringing optimism as well. The vaccination campaign is year—just shy of their total savings over the past seven ramping up in Canada, which will eventually allow public years combined. health measures to be relaxed. That is the key to a fulsome economic recovery. The Canadian economy has proven With public health restrictions expected to gradually ease more resilient than expected, and several factors are throughout the year, significant pent-up demand for social indicating it will rebound convincingly this year. interactions, massive savings, and cheap debt, we expect to see strong growth in consumer spending this year and On the global stage, growth is set to be much stronger into 2022. Households have already started pouring some than expected a few months ago, led by the sizable new of their excess savings into the housing market, a trend stimulus package brought forward by US President Joe that will continue this year. As back-logged demand is Biden in March. This will boost economic growth in the satiated and longer-term interest rates begin to rise, we United States and help buoy demand for Canadian expect to see some cooling in the residential real estate products. While this is good news on the surface, gains to market in 2022. the Canadian economy will be capped by the lack of business investment over the past few years.

Nevertheless, this increase in foreign demand will benefit both exports of goods and services this year and help some recover their pandemic losses; it is just that the growth will be limited.

Craig Alexander, Chief Economist and Executive Advisor, 3 Deloitte Canada Outlook summary

The sector that remains the biggest concern is business While we do not yet know the timing or composition of the investment. Even before the pandemic, Canadian spending, the federal government pledged in its fall update organizations were not investing near enough in their to spend between $70 and $100 billion on the recovery. development. Part of the issue is energy investment, which Our forecast assumes a share of that will be directed into remains far below its previous peak and is likely to remain infrastructure investments. weak given Canada’s commitment to moving to a low- Overall, Canada has households in a strong financial carbon future. Non-energy investment has also been weak, position, massive fiscal and monetary stimulus, and solid putting Canada at a competitive disadvantage and demand from our largest trading partner. Taking these hampering future economic growth. Statistics Canada’s factors into consideration, we’re looking at the Canadian latest survey of investment intentions shows that the trend economy expanding by 6.2% this year, the strongest pace of abysmal business investment is set to continue into this of annual growth since the early 1970s. With growth set to year. With global economic growth accelerating faster accelerate in the second half of 2021, next year also than anticipated, there’s a chance companies will be more appears to be a banner year for the economy, with real willing to invest than we forecast. But, given the serial GDP gaining another 4%. disappointment, we’ll believe in stronger investment when we see it. Without doubt, the economic recovery is in full swing. We should not, however, lose sight of the significant risks. Where we do expect to see stronger investment Business investment remains in the doldrums and more performance: the public sector. The federal government than half a million Canadians remain out of work. Better has opened its wallet on a number of fronts. During the investment and an inclusive labour-market recovery is peak of the crisis, the support came in the form of direct critical to our long-term success and prosperity. Ideally, the transfers to households to help cover losses to employment forthcoming federal budget will contain measures to help income and to businesses to cover a portion of the wage address these issues. However, governments can only bill. As we move further into the recovery, that support will create the environment—it’s up to the private sector to shift toward spending that underpins the government’s seed the growth needed to allow an inclusive, sustainable policy objectives. recovery.

Craig Alexander,© Deloitte LLPChief and Economist affiliated entities. and Executive4 Advisor, Deloitte Canada Canada’s current recovery

© Deloitte LLP and affiliated entities. 5 Canada’s economy was 3.3 % below pre-pandemic levels in December 2020 At the height of the pandemic, real GDP in Canada was $329 billion below its year-ago levels. That decline is 4.6 times steeper than what we saw at the height of the financial crisis in 2008-09.

Real GDP: Year-over-year change, January 2007 to December 2020 • After declining at an unprecedented Billions, chained $ pace in March and April 2020, the Canadian economy has been on a 100 steady upward trajectory. 50 • Indeed, despite a reintroduction of strict 0 public health measures towards the end of last year, the economy has remained -50 resilient. -100 • Overall, it ended the year 3.3% below its pre-pandemic level of output. -150

• While the recovery still has a long way -200 to go, preliminary estimates show the pace of growth accelerated in January. -250 With provincial vaccination campaigns -300 ramping up, 2021 is looking to be a much better year for the economy. -350 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Source: Statistics Canada © Deloitte LLP and affiliated entities. 6 The recovery in some sectors remains stalled When we look at which industries are recovering, there is a clear delineation between those where it’s easier to maintain physical distance or to work from home and those where close contact is the norm. For the latter, a true recovery will have to wait until public health measures can be further relaxed.

Real GDP, industries with easier distancing Real GDP, industries where distancing is more difficult % change from January 2020 to December 2020 % change from January 2020 to December 2020

Agriculture, forestry, fishing and hunting Wholesale trade

Finance and insurance Retail trade

Real estate and rental and leasing Health care and social assistance

Public administration Construction

Professional, scientific and technical services Manufacturing

Information and cultural industries Mining, quarrying, and oil and gas extraction

Educational services Other services

Utilities Transportation and warehousing

Administrative and support services Accommodation and food services

Management of companies Arts, entertainment and recreation

-10% -5% 0% 5% 10% 15% -60% -50% -40% -30% -20% -10% 0% 10%

Sources: Deloitte; Statistics Canada

© Deloitte LLP and affiliated entities. 7 The job market continues its recovery after a drop in January 2021 In February 2021, 599,000 fewer Canadians were employed compared to the February before. Despite the job recovery to date, that’s still 215,000 more unemployed than at the peak job loss during the financial crisis of 2008-09.

Year-over-year change in employment, January 2008 to February 2021 • While the labour-market recovery remains Thousands of jobs highly uneven across industries, regions, and population groups, both full-time and 500 part-time employment are trending upward. 0 • The unemployment rate now stands at 8.2% as of February 2021. This is the -500 lowest rate since March 2020. • Nevertheless, there’s still a long was to go. -1,000 In addition to those currently 2008-09 financial crisis unemployed, among those working part- -1,500 time, close to 24% want full-time work. COVID-19 -2,000 • The total number of hours worked also pandemic continues to recover. It rose 1.4% in February, driven mostly by gains in -2,500 wholesale and retail trade. Despite the gain, hours work remains 3.2% below pre- -3,000 COVID-19 levels. Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Sources: Deloitte, Statistics Canada © Deloitte LLP and affiliated entities. 8 Most job losses are in the accommodation and food services industry While overall employment is still well below where it was one year ago, the impact of the pandemic has been very different across industries. Most of the current job losses are concentrated in a few industries affected by public health measures. Conversely, industries that were able to transition to a work-from-home model have continued to grow.

Year-over-year change in employment, February 2020 to February 2021 000s of jobs

Sources: Deloitte, Statistics Canada

© Deloitte LLP and affiliated entities. 9 The employment recovery has not been equitable The sizeable labour market impacts in this recession have created challenges that will need to be addressed as the economic recovery unfolds.

Number of people unemployed more than 26 weeks • One of the challenges stemming from this 000s recession is the surge in long-term 600 unemployment. In February, nearly half a 500 million people had been unemployed for 400 at least half a year. Chronic 300 unemployment can lead to skills atrophy 200 and have lasting impacts on a person’s 100 earning ability. 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 • Another important distributional Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 May-01 May-03 May-05 May-07 May-09 May-11 May-13 May-15 May-17 May-19 consideration emerging from this crisis is the uneven impact by age and education Employment by education, February 2020 to February 2021 % change level. Above bachelor's degree • Young people continue to bear the largest Bachelor's degree relative brunt of the employment losses Post-secondary certificate or diploma compared to their older peers, and they are still down by double digits. Some postsecondary High school graduate • And those with less formal education have Some high school been hit hardest, while individuals with 0 to 8 years the highest levels of education are experiencing job gains. -10% -8% -6% -4% -2% 0% 2% Sources: Deloitte, Statistics Canada © Deloitte LLP and affiliated entities. 10 Canada’s resale home market is soaring The combination of low interest rates, strong disposable income growth and the desire for more space during the pandemic have lit a fire in Canada’s housing market, with demand and prices increasing at a breathtaking pace.

• In January, the sales-to-new-listings Sales-to-new listings ratio ratio in Canada’s resale market hit 91%. Demand hasn’t outpaced supply These are the tightest conditions since 100% to this extent in the history of the early 2000s, when the sales-to-new- CREA’s data series listings ratio hit 81%. 90%

• The market tightening was a 80% combination of soaring demand and reduced supply. The number of new 70% listings fell in January while the number 60% of residential properties sold once again

hit a new record. 50%

• Unsurprisingly, the strong increase in 40% demand coupled with a reduction in supply is fueling price growth. Average 30% resale home prices in January were up 22.8% relative to their year-ago levels. 20% Jul-90 Jul-95 Jul-00 Jul-05 Jul-10 Jul-15 Jul-20 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13 Jan-18 Sep-89 Sep-94 Sep-99 Sep-04 Sep-09 Sep-14 Sep-19 Nov-88 Nov-93 Nov-98 Nov-03 Nov-08 Nov-13 Nov-18 Mar-92 Mar-97 Mar-02 Mar-07 Mar-12 Mar-17 May-91 May-96 May-01 May-06 May-11 May-16

Sources: The Canadian Real Estate Association © Deloitte LLP and affiliated entities. 11 Retail sales are still performing relatively well The retail sector was one of the first to return to pre-pandemic levels of spending. However, the recent rounds of public health measures have taken some steam out of the recovery.

• After surging throughout last spring and Retail sales by category summer, retail sales growth cooled % change from February 2020 to December 2020 significantly in the last three months of 2020.

• Sales declined quite significantly in Cannabis stores December due to renewed public health Building material and garden equipment and supplies dealers

measures, a trend that was likely to persist Miscellaneous store retailers into January given that much of Ontario was under a stay-at-home order during the Food and beverage stores month. Electronics and appliance stores • By category, retailers of gasoline, clothing Health and personal care stores and footwear continue to be negatively Furniture and home furnishings stores impacted by the work-from-home trend, with their sales far below pre-pandemic Total retail levels. General merchandise stores

• On the flip side, households are pouring Motor vehicle and parts dealers money into their homes and enjoying their Sporting goods, hobby, book and music stores leisure time, as strong sales growth in Gasoline stations building material and cannabis sales suggest. Clothing and clothing accessories stores • Food and beverage stores have also continued to see strong growth, while -40% -20% 0% 20% 40% 60% 80% 100% 120% restaurant capacity remained limited. Sources: Deloitte; Statistics Canada © Deloitte LLP and affiliated entities. 12 Raw material prices are on the upswing With the global economy entering the recovery phase, commodity prices are rising. As a large producer of commodities, this is good news for Canadian exporters.

• Global demand for oil plunged during Raw materials price index by category the height of the pandemic last spring Index: January 2020 = 100 as citizens around the world stayed home and the demand for leisure travel 140 all but disappeared. 120

• With the global recovery picking up 100 steam, energy prices have perked up, but they remain well below their pre- 80 pandemic peak. 60

• The prices for other commodities 40 Canada produces, such as gold, copper and iron ore, are all doing very well. The 20 metal ore raw material index is up over 0 20% from last January. Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

• With the housing market hot in both Crude energy products Canada and the United States, forestry Logs, pulpwood, natural rubber and other forestry products product prices are also increasing. Metal ores, concentrates and scrap

Sources: Statistics Canada

© Deloitte LLP and affiliated entities. 14 After a sharp drop last year, the global economy is on the mend The pandemic wreaked havoc on economies around the world last year. Conditions are now improving, and the global economy is set to bounce back strongly enough this year that it will surpass its 2019 level of output.

• It is estimated the global economy shrank by 3.7% last year. This is slightly better Real GDP growth than forecasted last quarter but still marks 8% only the second time global GDP shrank during the last 40 years of comparable 6% data. • Not only has last year’s growth been 4% revised up, but so too has the outlook for global growth. Three months ago, the 2% global economy was projected to bounce back by 5.1%. With vaccines rolling out 0% quicker than expected and a large US stimulus package approved, global growth -2% is now expected to reach 5.6% this year. • Growth in the Asia Pacific region is being -4% lifted by China where a contraction was avoided last year, and by an expected gain -6% of 8.9% this year as demand for their Advanced Economies Asia Pacific Emerging Markets World exports accelerates. 2020f 2021f 2022f

Sources: Oxford Economics, Deloitte © Deloitte LLP and affiliated entities. 15 Fiscal stimulus is set to propel a strong US recovery Compared to other developed economies, the contraction in the United States was not as extreme in 2020 due to less- restrictive public health measures. This year is set to be a banner year for growth for our southern neighbours, with its economy expected to surpass its pre-pandemic peak before the first half of 2021 is over.

• The stimulus taps are turned on full blast US real GDP growth in the United States. On the monetary policy side, the US Federal Reserve has 8% slashed its federal fund rate to between 0 and 0.25%, deployed a quantitative easing program, and is using forward guidance. 6% • With its new average inflation targeting, it has stated its intent to let inflation rise 4% above 2%, which means an extended period of monetary stimulus. 2% • On the fiscal front, President Joe Biden’s US$1.9 trillion stimulus package will lift the 0% economic recovery, which was already benefiting from previous rounds of stimulus. Total fiscal stimulus in the US -2% amounts to nearly US$6 trillion since the start of the pandemic. -4% 2007 08 09 10 11 12 13 14 15 16 17 18 19 20f 21f 22f 23f • Overall, the US economy is expected to grow by 5.9% this year after contracting by 3.5% in 2020. Sources: Oxford Economics, Deloitte, United States Bureau of Economic Analysis © Deloitte LLP and affiliated entities. 16 Canadian outlook National perspective

© Deloitte LLP and affiliated entities. 17 The economic recovery will gain steam this spring The Canadian economy has proved resilient during the second wave of coronavirus infections. With vaccinations ramping up and warmer weather around the corner, growth is expected to accelerate in the spring and summer. Overall GDP is set to increase by 6.2% this year.

Real GDP, quarter-over-quarter annualized growth

50% 40.6% 40% 30% 20% 9.8% 8.0% 10% 4.2% 4.6% 5.3% 3.4% 2.4% 2.6% 2.3% 0% -10% -7.5% -20% -30% -40% -50% -38.5% 2020Q1 20Q2 20Q3 20Q4 21Q1f 21Q2f 21Q3f 21Q4f 22Q1f 22Q2f 22Q3f 22Q4f

Real GDP, annual growth

8% 6.2% 6% 4.0% 3.0% 4% 2.4% 1.9% 1.8% 1.0% 1.7% 1.7% 2% -5.4% 0% -2% -4% -6% 2016 17 18 19 20 21f 22f 23f 24f 25f

Sources: Deloitte, Statistics Canada © Deloitte LLP and affiliated entities. 18 Canadian Outlook Household sector

© Deloitte LLP and affiliated entities. 19 The labour market is expected to recover in 2021, with growth peaking in the third quarter With economic growth accelerating in the spring and summer, so too will labour-market gains. After a rocky start to the year, employment will rebound strongly throughout the rest of 2021.

Employment growth and unemployment rate • More than 590,000 jobs remain lost 000s since February 2020. However, we still expect positive employment growth in 2,000 14% the first quarter of 2021 as public health 1,500 restrictions continue to ease in some 12% provinces. 1,000 10% • With the ongoing vaccine rollout and 500 warmer months fast approaching, we forecast employment to reach its 0 8% pandemic levels before the end of 2021. -500 6% • Employment is projected to increase by -1,000 5.6% this year. 4% -1,500 • The unemployment rate will trend down 2% to 6.6% by early 2022, but is expected to -2,000 stay above 6% for years to come. Long- -2,500 0% term unemployment remains elevated, 2019Q1 19Q2 19Q3 19Q4 20Q1 20Q2 20Q3 20Q4 21Q1f 21Q2f 21Q3f 21Q4f 22Q1F 22Q2F and this typically has lasting impacts on the labour market. Change in employment (left axis) Unemployment rate (right axis)

Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 20 Sectors hit hardest by tighter pandemic restrictions should see the greatest increase in employment Employment gains are predicted to be uneven: some sectors expecting to surpass pre-COVID-19 levels by the end of 2021, while others are struggling to recoup their labour market losses.

• Employment in sectors hit hardest by tighter Change in employment by industry, 2021 restrictions in the winter–such as 000s accommodation and food services, and wholesale and retail trade–is expected to Health Care and Social Assistance rebound throughout 2021, returning to pre- Accommodation and Food Services pandemic levels by the end of the year. Wholesale and Retail Trade • To meet the vaccination rollout schedule and Educational Services the pent-up demand as non-essential health Manufacturing care services resume, employment in health Construction care and social services is predicted to rise by Professional, Scientific and Technical Services 6.8%. Transportation and Warehousing • With Quebec universities announcing their Finance, Insurance, Real Estate and Leasing plans to resume in-person teaching and other Other Services educational institutions across the country Public Administration and Defence expected to follow suit, we predict a strong increase in employment in educational services Information, Culture and Recreation this year. Other Primary Building and other Support Services • However, as ongoing restrictions limit large gatherings, employment in information, Utilities culture, and recreation is not expected to grow Agriculture as much as in other sectors hard-hit by the 0 20 40 60 80 100 120 140 160 180 pandemic. Employment in this sector is set to increase by only 0.2% this year. Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 21 Signs of a slowdown in household savings emerge as consumers regain confidence Households saved $211 billion last year. That’s roughly as much as they saved in the last seven years combined. Consumer spending is set to benefit as that savings is unleashed into the market.

Household savings • The household savings rate declined from $C billions 14.6% in the third quarter of last year to 12.7% in the fourth. This is still more than 250 four times higher than its average of 3% from 2000 to 2019. • While we expect household savings to 200 remain elevated until 2023, the easing of provincial restrictions and an acceleration in vaccinations will help restore consumer confidence, and households will spend some 150 of those savings. • Amid growing concerns about repayment of COVID-19 benefits, the federal government 100 announced that self-employed persons who received a net income of less than $5,000 will not be required to pay back their 50 benefits as long as their gross employment income was above $5,000. • Personal consumption is roughly 55% of GDP, 0 so the consumer outlook is fundamental to 72 74 76 78 80 82 84 86 88 90 92 94 96 98 02 04 06 08 10 12 14 16 18 20 the recovery, with both upside and downside 22f 24f risks to the forecast. 1970 2000 Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 22 Service spending is still slumped, but recovery is to come in 2021 With the approval of four vaccines (so far) and the easing of provincial restrictions, consumer expenditures are expected to shift from goods and toward services in 2021, a trend that will peak in 2022.

Growth in real consumer spending • The emergence of coronavirus variants and spikes in cases across Canada led to 15% extended restrictions and a decline in household spending in the fourth quarter of 2020. 10% • Expenditures on services continued to lag while semi-durable goods, particularly for recreation, drove household spending 5% decisions during the lockdowns. • However, with the approval 0% of four vaccines by the federal government, the easing of provincial restrictions, and improvements in labour -5% market conditions, consumer spending growth is set to accelerate. -10% • Household expenditures on accommodation, food and beverage services, and clothing are expected to -15% start rebounding strongly beginning in 2020 21f 22f 23f the third quarter of 2021 as the economy reopens and social activities increase. Durable goods Semi-durable goods Non-durable goods Services

Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 23 The housing market is set to settle down from lofty highs Canada’s housing market has been one of the strongest-performing sectors coming out of the recession. The spectacular growth posted over the past few quarters is, however, expected to slow to a more sustainable level of activity.

Average resale home prices • Canada’s resale housing market has 000s been on fire since last summer. With demand growth so strong, new housing $750 construction has also accelerated. $700 • Despite the shutdowns last spring, housing starts were up 5.3% in 2020, $650 averaging 219,000 units. Starts will $600 continue to grow this year, pushing just above 230,000 units before starting to $550 pull back next year. $500 • Strong demand for housing has led to $450 soaring housing prices. Low interest rates are helping keep homes relatively $400 affordable but as prices continue to tick up, that will weigh on future demand. $350 $300 • Overall, GDP associated with real estate transactions will increase by 13% this year, a touch stronger than the gain observed in 2020. Sources: Deloitte, Canadian Real Estate Association © Deloitte LLP and affiliated entities. 24 The improvement in household debt levels proves to be short-lived Thanks to a surge in federal transfers, household disposable income increased sharply in 2020, bringing down the ratio of household debt to disposable income. However, this trend is set to reverse later this year.

Household debt to disposable income • After years of trending upward, there ratio was a brief dip in household debt burdens as incomes increased and 2 residents stayed home, limiting their accumulation of additional debt. 1.9

• When restrictions began to ease last 1.8 summer, however, the housing market took off. Prices increased substantially. 1.7

• These higher home prices have yet to 1.6 act as much a deterrent to buyers who are now racking up mortgage debt. 1.5

• By the time the first quarter of this year 1.4 is over, we expect that the ratio of household debt to disposable income 1.3 will have reached its pre-pandemic level —and will soar past it in the second 1.2 quarter. 05Q3 06Q1 06Q3 07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3 18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1f 21Q3f 22Q1f 22Q3f 23Q1f 23Q3f 2005Q1

Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 25 Canadian Outlook Business sector

© Deloitte LLP and affiliated entities. 26 Business investment will see a modest bounce-back in 2021 Companies are projected to hold back on business investment this year. After falling by a whopping 11.6% in 2020, investment is expected to rebound by just 5.4%.

Oil-and-gas sector investment and non-energy investment • Canadian business investment has been Chained $C billions sluggish for years. When oil prices

collapsed in 2014, investment in the oil $90 $250 and gas sector fell by half, or $40 billion, over two years. $80 $200 • For the next several years, non-energy $70 investment remained sluggish, despite a $60 lower Canadian dollar and strong demand $150 south of the border. $50 $40 • The collapse in oil prices during the $100 pandemic reduced investment in the oil $30 and gas sector by another 34%. Despite the $20 recent improvement in oil prices, $50 investment is not projected to improve $10 significantly from its current low. $0 $0 • Investment will perform better in the rest of the economy, but it is not expected to reach pre-pandemic highs until 2023. Investment in the oil and gas sector (left axis) Non-oil and gas investment (right axis)

Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 27 Investment expectations differ substantially across industries By industry, the largest growth this year will be in the utilities and the transportation sectors. By category, much of the recovery will be in machinery and equipment and software; while construction remains flat.

• By sector, the largest decline in investment Real business investment growth by industry in 2020 was in the mining sector. Substantial declines were also seen in 20% manufacturing, agriculture, wholesale, 15% retail, professional services, accommodation and food services, and 10% arts and recreation. 5% • This year, companies are projected to 0% restore their budget by only about half the -5% amount cut last year. However, according to Statistics Canada’s Investment Intention -10% Survey, several sectors—including the arts -15% and entertainment, accommodation, -20% finance and agriculture—will reduce their investment again this year. -25% • The largest increase in 2021 will be in the -30% utilities sector, which is related to large -35% hydroelectric projects. Finance Manufacturing Mining Other Utilities Transportation • Other sectors are projected to see only a 2020 2021 modest recovery. Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 28 Capital stock will decline again in 2021 With the level of investment remaining well below pre-pandemic levels, the value of Canada’s fixed assets will decline this year and see only modest growth in the near future.

Fixed assets in the business sector, constant dollars • The level of fixed assets or capital stock in % change Canada is a measure of the value of 0.05 buildings and machinery owned by Canadian businesses. • With the rebound in investment projected 0.04 to remain modest, the amount of capital stock in the business sector is expected to 0.03 decline again in 2021. • On a per-employee basis, the value of capital stock in Canada has been declining 0.02 since 2015. • While growth is projected to turn positive 0.01 in 2022, we are not expecting to see anywhere near the growth generated prior to 2014. 0 • Weak capital stock growth will limit the maximum pace of growth Canada’s -0.01 economy can sustain after 2023 to well below 2%.

Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 29 Trade recovery is masking Canada’s trend of declining market share Exports of goods are expected to rebound this year, but the long-term trend is one of sluggish growth. Non-energy exports have recorded little growth since 2000. Given the weak business investment, this is unlikely to improve.

Exports of goods, U.S. imports of goods • Strong US imports will fuel a rebound in Index 1990Q1 = 1 Canadian exports in 2021 but the long- term prospects are mixed. 5.8

• Over the last two decades, energy exports 5.3 have made up almost all the growth in total merchandise exports. With energy 4.8 investment projected to remain weak, 4.3 Canada will need to look to the non-energy side for stronger export growth. 3.8 • Excluding energy, merchandise exports 3.3

have managed just 1.4% growth from 2015 2.8 to 2019. Meanwhile, US imports have risen by 11.9%–meaning Canada has lost 2.3 significant market share. 1.8 • To see a greater export-supported 1.3 recovery, Canada needs to post a much better performance than it has the last 0.8 decade. That will require much better 2023Q4 business investment and competitiveness 1990Q1 1990Q4 1991Q3 1992Q2 1993Q1 1993Q4 1994Q3 1995Q2 1996Q1 1996Q4 1997Q3 1998Q2 1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3 2016Q2 2017Q1 2017Q4 2018Q3 2019Q2 2020Q1 2020Q4 2021Q3 2022Q2 2023Q1 than our current outlook predicts. Exports of non-energy goods Energy exports U.S. imports of goods

Sources: Statistics Canada, forecasts by Deloitte

© Deloitte LLP and affiliated entities. 30 Services exports won’t start rebounding until Canada reopens for travel Travel restrictions have taken a substantial toll on Canadian service exports. With the second wave of the virus continuing to restrict the ability to travel, the recovery in services exports will be protracted.

• As the pandemic unfolded, exports of Exports of goods and services services were hit harder than goods: Merchandise exports fell 8% in 2020, while 25% services declined 17.4%. 20% • Easing of restrictions around the globe, solid US economic growth, and a recovery 15% in raw material prices will allow merchandise exports to rebound by 6.7% 10%

this year. The pace of growth will then 5% ease, held back by the capacity constraints of Canadian exporters. 0%

• Exports of services, which are closely -5% linked to travel, will take longer to recover. • As the health crisis subsides and borders -10% reopen, likely in late 2021, services exports -15% are expected to rebound. -20% 2017 18 19 20 21f 22f 23f Merchandise exports Services exports

Sources: Statistics Canada, forecasts by Deloitte © Deloitte LLP and affiliated entities. 31 Canadian outlook Monetary and fiscal policy

© Deloitte LLP and affiliated entities. 32 Monetary policy will remain accommodative throughout the economic recovery With its policy interest rate still at the effective lower bound, the Bank of Canada is maintaining its quantitative easing (QE) program and its forward guidance to markets.

• The Bank of Canada’s QE program is still in Bank of Canada assets place, with purchases currently continuing at a $C billions pace of at least $4 billion per week. The bank $700 said it will maintain this pace until the recovery $600 is well underway, with adjustments if needed. $500 Start of QE program $400 • The Bank of Canada’s three measures of core $300 $200 inflation continue to show near-target $100 increases. Total CPI inflation is still in the lower $0 half of the 1-3% target band but it is likely to Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20

move toward 2% in the next few months. Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

However, the bank is waiting for inflation to be Jan 2000 consistently above target before raising its Measures of Canadian inflation policy interest rate. Our forecast expects the January 2021, year-over-year growth first hike at the beginning of 2023. 3% • Our forecast currently suggests the path of 2.0% 2.0% 2% 1.6% policy interest rates will be similar in the 1.3% 2% 1.0% United States and in Canada. However, given 1% that the Federal Reserve changed its inflation 1% target last year to average-inflation targeting, 0% there is a chance the Fed will be slower in Total CPI Previous core CPI CPI-trim CPI-common CPI-median raising rates. (CPI less 8 most volatile components and indirect taxes) Sources: The Bank of Canada, Statistics Canada © Deloitte LLP and affiliated entities. 33 The federal government is facing a deep fiscal deficit The aggressive response from the Government of Canada was necessary to avoid a deeper and longer-lasting recession. However, it will take years to restore its fiscal balance.

Federal net lending • The federal deficit (on a national $C billions accounts basis) soared past $400 billion in the second quarter of 2020 as the 50 federal government provided income relief to households and businesses. 0

• The federal deficit started to decline as -50 emergency relief measures were scaled -100 back. Nevertheless, for 2020, it is expected to average $222 billion. -150

• The deficit is projected to slowly shrink -200 over the next few years. -250 • However, with the federal government -300 expected to spend between $70 and $100 billion in stimulus spending over -350 the next few years, it will take years to restore fiscal balance. The government -400 will eventually need to provide a fiscal -450 anchor and /or fiscal path. 2018Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1f 21Q3f 22Q1f 22Q3f

© Deloitte LLP and affiliated entities. 35 The hospitality sector is in for a better year after a devastating 2020 Many industries suffered record-breaking declines in output last year. Growth will be led by industries serving domestic demand as Canadians unleash their pent-up demand and sizeable savings into the market.

Real GDP by Industry • Almost every major industry is set to Growth in 2021 grow this year. The arts, entertainment, and recreation industry, which typically Arts, entertainment and recreation requires more sizeable gatherings, will Accommodation and food services see substantial growth this year but Administrative and support services remain well below pre-pandemic levels. Wholesale trade Retail trade • Strong growth will occur in Health care and social assistance accommodation and food services, with Manufacturing pent-up demand for social-based Educational services activities surging as public health Agriculture, forestry, fishing and trapping and support restrictions gradually loosen. Professional, scientific and technical services Transportation and warehousing • Manufacturing activity will also Waste management and remediation services experience a strong recovery this year Government due to rebounding global demand and Construction strong growth in the United States. Information and cultural services Finance, insurance, real estate and rental and leasing • Despite the uptick in global growth, Mining, oil & gas output growth in Canada’s mining and Utilities oil and gas industry will remain subdued -5% 0% 5% 10% 15% 20% 25% 30% as investors remain cautious. Sources: Deloitte and Statistics Canada © Deloitte LLP and affiliated entities. 36 Assumptions and risks

© Deloitte LLP and affiliated entities. 37 The economic outlook depends on the evolution of COVID-19 The Canadian economy remained resilient as the second wave of COVID-19 infections spread across the country. Regardless, the pace at which public health restrictions are eased will shape the pace of the recovery.

Number of daily new COVID-19 cases in Canada • After surging in the winter, COVID-19 February 2020 to March 14, 2021 cases have come down substantially thanks to strict public health measures. 10,000

• Our forecast assumes that many 9,000 populous regions of the country will until May remain under restrictions that 8,000 greatly limit social interactions. By then, 7,000 higher rates of vaccination and warmer weather will allow for more outdoor 6,000 gatherings and a further easing of guidelines around indoor interactions. 5,000 4,000 • We also assume that every Canadian who wants a vaccine will have one by 3,000 September. The pace of global vaccination varies considerably from 2,000 country to country, however, which will 1,000 prolong the recovery of the tourism sector. 0 2/8/2020 4/8/2020 6/8/2020 8/8/2020 10/8/2020 12/8/2020 2/8/2021

As has been the case throughout the pandemic, the The other trend in this recovery is the uneven impact. We economic landscape has once again shifted significantly are not seeing equitable economic outcomes across since our last outlook. This time, the shift has been sectors, races, age groups, education levels, and genders. positive: Canada’s economy is proving resilient, vaccination The strong economic growth expected over the near term deliveries are ramping up, and many factors are working is unequivocally a good thing. The strength of the recovery together to lift growth prospects. Of course, there remains is now expected to lift us above pre-pandemic levels of considerable uncertainty in the outlook, due to uncertainty output and employment before the end of 2021. However, about the evolution of the virus and its variants of concern. until we see more productivity-enhancing investments and Nevertheless, the data we have now, and the results of our a recovery that lifts the fortunes of all Canadians, we will analysis, clearly point to better economic times ahead. still have a way to go before we can say that we have truly While the strength of the recovery has changed from our recovered from this unprecedented economic shock. last forecast, what hasn’t varied is the composition of that growth. The economic recovery continues to be fuelled by consumer and government spending, as rock-bottom interest rates make it affordable to buy now and pay later. Exporters are in for a better year than previously expected thanks to the large stimulus spending plan in the United States. However, this is just pulling forward some of the growth that was previously predicted to occur next year and into 2023, as we cannot escape the fact that the weakness in business investment over much of the last decade has severely curtailed Canada’s ability to respond to increases in foreign demand for goods outside the energy sector. Unfortunately, Canadian businesses seem set to double down on this lackluster track record, as we anticipate another year of subdued investment spending.

2020 2021 2022 20A 21F 22F Q4A Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F Real economic activity Gross domestic product 9.8 4.2 4.6 8.0 5.3 3.4 2.4 2.6 2.3 -5.4 6.2 4.0 Consumption expenditure 1.8 1.4 6.5 9.2 6.3 4.6 3.5 3.1 2.5 -4.7 5.2 5.0 • Durable goods -0.7 1.4 0.3 0.1 0.8 1.7 2.0 1.5 0.9 -3.7 13.0 1.2 • Services 0.9 -3.1 13.3 21.2 13.3 9.3 6.1 4.9 4.0 -10.3 4.3 10.1 Residential investment 20.5 -3.7 -11.0 -5.9 -2.1 -1.0 1.7 1.6 1.7 4.0 8.2 -1.5 Non-residential fixed investment 4.2 11.5 10.7 10.4 7.3 3.7 4.3 4.2 4.5 -13.1 4.9 5.8 • Non-residential structures -10.2 13.1 9.7 11.2 7.6 3.6 4.6 4.3 4.5 -11.2 0.0 5.9 • Machinery & equipment 31.1 9.1 12.4 9.3 7.0 3.7 3.9 4.2 4.5 -16.4 13.2 5.7 Government consumption & investment 6.1 4.9 3.4 5.8 4.5 2.1 1.4 0.7 -0.3 -0.3 5.2 2.6 Exports of goods & services 5.0 4.2 3.8 6.9 6.1 6.5 5.1 3.9 3.5 -9.8 5.7 5.5 Imports of goods & services 10.8 -1.0 7.6 8.8 9.5 9.4 6.6 3.9 2.6 -11.3 7.7 7.5 Prices Consumer price index (y/y) 0.8 1.1 2.0 1.7 1.7 1.9 2.2 2.4 2.2 0.8 1.7 2.2 Implicit GDP price index (y/y) 1.7 3.9 5.2 3.2 2.7 1.9 1.8 1.8 1.9 1.7 2.7 1.9 Labour market Employment 9.9 2.6 5.8 6.1 3.9 2.2 1.4 0.6 0.5 -5.1 5.6 2.7 Unemployment rate (%) 8.8 8.7 8.0 7.6 6.8 6.6 6.4 6.4 6.4 9.6 7.8 6.4 Note: Unless otherwise noted, all figures are expressed as annualized % changes. Sources: Statistics Canada, Bank of Canada. Forecast by Deloitte Economic Advisory, as of March 16, 2021.

2020 2021 2022 20A 21F 22F

Q4A Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Interest rates (%)

Overnight rate target 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

3-month T-bill 0.10 0.12 0.15 0.17 0.18 0.19 0.19 0.20 0.20 0.10 0.18 0.20

1-year GoC note 0.17 0.19 0.32 0.39 0.44 0.47 0.49 0.51 0.52 0.17 0.44 0.52

2-year GoC note 0.24 0.26 0.30 0.32 0.34 0.36 0.37 0.38 0.39 0.24 0.34 0.39

5-year GoC note 0.41 0.59 0.62 0.64 0.66 0.68 0.69 0.71 0.72 0.41 0.66 0.72

10-year GoC bond 0.66 1.05 1.07 1.08 1.08 1.09 1.09 1.09 1.09 0.66 1.08 1.09

Yield curve spread (pp)

3-month vs. 10-year 0.56 0.93 0.92 0.91 0.90 0.90 0.90 0.89 0.89 0.56 0.90 0.89

2-year vs. 10-year 0.43 0.79 0.77 0.76 0.74 0.73 0.72 0.71 0.71 0.43 0.74 0.71

Foreign exchange

USD/CAD ($C) 1.30 1.27 1.26 1.26 1.26 1.26 1.26 1.25 1.25 1.30 1.26 1.25

CAD/USD (US cents) 0.77 0.79 0.79 0.79 0.79 0.79 0.79 0.80 0.80 0.77 0.79 0.80

Sources: Statistics Canada, Bank of Canada. Forecast by Deloitte Economic Advisory, as of March 16, 2021.

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