Bank of Canada projects short-term pain, long-term gain for economy in 2021

By Ian Burns

Law360 Canada (January 22, 2021, 9:17 AM EST) -- Canada’s central bank is holding interest rates steady and projecting economic growth to increase in the latter part of 2021 as vaccines and lockdowns begin to bring the number of COVID-19 cases down, but is also warning that in the short term the pandemic will continue to be a burden on employers in industries such as restaurants and hotels.

In its January monetary policy report, the Bank of Canada says the economy will shrink by roughly 2.5 per cent in the first quarter of 2021 but is estimating fourth-quarter growth reaching nearly five per cent, leading to an expansion of the economy by four per cent in the second half of 2021 and almost five per cent in 2022.

At a press conference Jan. 20, Bank of Canada governor Tiff Macklem said the current surge of COVID-19 cases was a serious setback, but with effective vaccines rolling out the prospects for a sustained recovery through the second half of 2021 have improved in Canada and across most advanced economies.

“When the current restrictions are eased, we can expect a sharp bounce back in economic activity,” he said. “And, unlike the first lockdown in March, we now have a clearer sense of the way forward, thanks to effective vaccines that have arrived sooner than we had anticipated. As these vaccines are distributed, they will save lives and livelihoods.”

But Macklem noted the burden of the renewed weakness of the economy is falling disproportionately on workers and businesses in high-contact industries, such as restaurants, hotels and travel services.

“In the near term, the highly uneven impacts of the pandemic will likely increase. But containment measures are temporary,” he said. “And as we move toward broad immunity, we can expect uncertainty about the pandemic to fade and business confidence to improve. This will lead to stronger business investment and exports, consistent with a more broad-based and sustainable recovery.”

The bank held its overnight interest rate at 0.25 per cent, a record low, with the bank rate at 0.5 per cent. Consumer price index (CPI) inflation is forecast to rise temporarily to around two per cent in the first half of the year, as the effects of price declines at the pandemic’s outset — mostly gasoline — dissipate. A broad-based decline in the U.S. exchange rate, combined with stronger commodity prices, have led to an appreciation of the Canadian dollar.

Macklem also said the bank would continue its quantitative easing (QE) program of purchasing bonds to inject money into the economy, which continues at its current pace of at least $4 billion per week.

Despite the optimistic outlook by the bank, observers expressed the need to continue supporting businesses which have been affected by the pandemic. Trevin Stratton, chief economist and vice-president of policy at the Canadian Chamber of Commerce, said Canada still faces powerful headwinds in 2021 due to the increase in COVID-19 numbers and restrictions on activities, which is leading to great economic uncertainty.

“We will likely be in this phase well into March, when we expect the lockdowns to be eased across the country,” he said. “During this period, we need to provide the right kind of support to individual Canadians and to businesses to get them through the lockdowns, recognizing that neither group is in the same financial position as it was in March 2020. We need to ensure that both individuals and businesses can make it safely to the other side of the river.”

And the Canadian Federation of Independent Business (CFIB) noted that one in six Canadian small business owners are seriously contemplating a permanent closure, which would put more than 2.4 million jobs at risk on top of the 58,000 businesses that became inactive in 2020.

“Although there is still time for business owners to reverse course if conditions improve, it is alarming to see an increasing number considering permanent closure, compared to our first estimate last summer,” said Simon Gaudreault, senior director of national research at the CFIB. “We are not headed in the right direction and each week that passes without improvement on the business front pushes more owners to make that final decision.”

More information about the bank’s announcement can be found here.

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