Canadian restrictions to tackle COVID-19 is likely to cost lower economic growth at the beginning of the year than in the US, but that has not stopped investors from raising bets Bank of Canada will raise interest rates next week.
With hospital capacity stretched, Canadian provincial governments have rolled out restrictions that are stricter than in the United States and many other countries to curb the spread of the Omicron variant of the coronavirus.
As a result, economists at some of the major Canadian banks expect little or no GDP growth in Canada in the first quarter, compared to estimates of around four percent to five percent before the advent of
“I see much greater risk to the Canadian numbers than the US numbers, simply because we see much more important restrictions in Canada,” said Doug Porter, chief economist at BMO Capital Markets.
But economists also say activity is likely to rise rapidly once restrictions are lifted.
Investors seem to be counting on it. Money market data on Monday showed that the chances of the Bank of Canada announcing a rate hike on January 26 have risen to nearly 70 percent after a central bank survey of companies pointed to higher wage pressures.
That would be an earlier step than the Canadian central bank has signaled, and a faster boost than in the US, where the Federal Reserve is not expected to raise interest rates until March.
For the first time next week, BoC will provide its estimate for economic growth in the current quarter.
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“We think the Bank of Canada will downgrade their Q1 forecast in January, as we have just done, but in terms of the impact (of shutdowns) on inflation, it is not so clear,” said Josh Nye, senior economist at Royal Bank. of Canada.
“You may have a little disinflation pressure in some of the service sectors that will be hardest hit by this, but when you have people who are unable to go to work, it affects the supply side of things.”
The Canadian healthcare system is expected to be further burdened by an increase in the case of the new variant in the coming weeks.
When it comes to capacity in hospitals and clinics, only Italy was ranked lower than Canada among the G7 countries in the 2021 Global Health Security Index.
Ontario, Canada’s most populous province, temporarily moved schools to distance education and closed indoor dining among other measures, while neighboring Quebec banned private gatherings and imposed a night-time ban on the province to combat Omicron.
Still, Canada’s economy has the potential to surpass that of the United States for the full year, as Canadian activity was held back more by previous waves of the pandemic as well as drought and chip shortages that slowed car production in 2021.
Canada’s economy is only expected to have risen back to its pre-pandemic peak in the fourth quarter of last year, two quarters later than in the United States.
“There is a lot of room for Canada to play catch-up,” Porter said, predicting a 2022 percent growth in 2022.
“We have a suspicion that after we get through the mess in the first quarter of Canada, we will surpass the United States for the rest of the year.”
(Reporting by Fergal Smith Editing by Paul Simao)