• The effects of the vicious third wave of the pandemic on the economy are being overtaken by continued resilience and positive surprises to indicators.

  • Risks remain tilted to the upside, owing largely to President Biden’s attempts to raise government spending even further.

  • The Bank of Canada is likely to raise interest rates in 2022-Q3, well ahead of the Fed owing to higher inflation and markedly better labour market outcomes in Canada. The Fed is expected to move in 2023-Q1. Both central banks will raise interest rates by 25 bps a quarter once they start hiking.

Despite very worrisome developments on the pandemic front in recent weeks in many countries, incoming economic data continue to suggest outcomes are surpassing expectations. This is particularly true in the United States and Canada. In the former for example, March retail sales were exceptionally strong on account of stimulus cheques. In Canada, the March labour market readings were very robust with employment now only 1.5% off pre-pandemic levels, and housing construction particularly strong. There is no doubt, however, that tightened mobility restrictions will have an impact on countries that have imposed them.

In Canada, the strength of incoming data, solid growth prospects in the US, and higher commodity prices are leading us to raise our forecast for 2021 to 6.4% (from 6.2%) and to 4.1% in 2022 (from 4.0%). This upward revision is tempered by the economic impacts of the third COVID wave, which we now believe will shave 3 percentage points from 2021-Q2 growth, leaving growth at 2.9% in that quarter. Canadian output is likely to return to pre-COVID levels during the summer. The speed of this recovery is nothing short of exceptional given that many forecasters (including us) had earlier called for an early- to mid-2022 return to pre-pandemic activity. The K-shaped recovery is still very much at play as the pandemic continues to weigh on COVID-affected sectors of the economy, while almost every other sector is doing substantially better.

As in Canada, the US economy continues to recover strongly. We have raised our forecast to 6.6% (from 6.3%) in 2021 but reduced it slightly to 4.3% (from 4.4%) in 2022. Our revision mostly reflects the strength of incoming data though we are also currently including about half of President Biden’s infrastructure plan. As a result, the risks to our forecast are tilted to the upside given the likelihood that significantly more fiscal spending occurs in the next few years (more infrastructure and other planned announcements).

Though growth outcomes are expected to be roughly similar in both countries this year, labour market dynamics are significantly better in Canada (chart 1). US employment remains 5.5% below pre-pandemic levels while Canada is only 1.5% away. The participation rate is only 0.3 percentage points lower in Canada than it was in February 2020, while it is 1.8 percentage points lower in the US. The labour force is already above pre-pandemic levels in Canada but remains over two percentage points below in the US.


These differential labour market outcomes matter from a monetary policy perspective. While core inflation measures are close to the Bank of Canada’s target, core PCE inflation in the US is further away. For the Fed, the dual mandate means they need to incorporate labour market under-performance in their policy stance as well. As a result, we believe the BoC will raise rates well ahead of the Fed, as early as 2022-Q3. We expect the Fed will need to raise rates early in 2023, even though that timeline is quite accelerated relative to current communications from Fed officials. We do not believe that a later tightening by the Fed will pose a challenge for the BoC.

As noted above, risks to the forecast appear tilted to the upside given the likelihood of further fiscal measures in the US. This is despite a vicious phase of the pandemic and tighter-than-expected containment measures in many countries. From an economic perspective, it has been very reassuring to observe the economy’s resilience in the face of the virus’ evolution despite the very heavy human cost of the pandemic. We anticipate this divergence in economic and public health outcomes will last.






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