Canada’s Outlook to 2040: Overview

Updated: December 14, 2020

Expect slow growth over the long term

The Canadian economy bounced back in recent months following the deep economic repercussions of the COVID-related shutdown. The quick rebound is good news, but Canada’s economy still has a way to go before it can be deemed to have returned to normal. The main factors behind the weak growth through 2040 are an aging population and sluggish productivity growth. Increased immigration will help to counteract the effects of an aging population, and higher growth over the long term is attainable if Canada can improve its productivity growth.

Contents of the long-term December 2020 summary:

The shape of Canada’s recovery
Demographic and labour market developments
GDP growth to track potential output
Monetary policy still focused on stimulus for now
Record deficits weigh on fiscal policy
Aggregate demand returning, but also changing

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Key findings

The economy is expected to recover from the effects of the COVID-19 pandemic through the medium term, but growth will slow over the long term to average annual gains of about 1.7 per cent

The main factors behind the weak growth through 2040 are an aging population and sluggish productivity growth. Increased immigration will help to counteract the effects of an aging population, and higher growth over the long term is attainable if Canada can improve its productivity growth.

Interest rates in Canada will slowly increase from near zero levels through the medium term, but short-term rates are likely to remain below 2.0 per cent through 2040, held back by subdued economic growth and inflation. Over the long term, the Bank of Canada will have to shrink its balance sheet, which ballooned when the Bank went on a massive bond-buying spree during the pandemic to ensure that financial markets remained liquid. That could put upward pressure on bond yields.

The Canadian dollar will slowly appreciate to US$0.80 over the long term, thanks to a gradual increase in world oil prices and a weaker greenback. However, we don’t expect the loonie to return to par against the U.S. dollar over the long term, mainly because oil prices are expected to remain well below $100 per barrel through 2040.

Large deficits built up during the pandemic will persist through most of the long term but will gradually decline. By 2040, the federal government’s fiscal position should have improved considerably. Still, rising health care demands and the needs of cash-strapped provinces and cities will place upward pressure on spending, leading to difficult decisions.

Spending on services will expand at a quicker pace than spending on durable goods over the long term.

Some of the impacts on the economy from the pandemic are likely to persist through the long term, especially in such sectors as commercial real estate, housing, and business travel.