• The Delta variant of COVID-19 is unlikely to prompt a return to widespread mobility restrictions.
  • Economic data continue to come in on the stronger side of expectations globally, and we are revising our forecasts up accordingly.
  • While some emerging market central banks have begun raising interest rates, policymakers in advanced economies are some distance from doing so. The Bank of Canada should be the first to move, but only in July 2022.

The Delta variant makes clear that we are not yet done with COVID. Financial markets have been spooked by the potential economic and financial impacts of the surge in cases being observed globally, sparking risk-off moves affecting currency, credit, and foreign exchange markets since our forecasts were last updated. However, we consider the Delta variant to be much less troubling from an economic perspective than the previous waves and we are, in fact, raising our forecast for global growth this month. We now expect the global economy to advance by 6.3% this year rather than the 6.2% we last predicted, followed by growth of 4.5% next year, unchanged from our previous forecast.

The experience resulting from the Delta variant thus far makes clear the benefits of aggressive vaccination campaigns. Even though the virus appears to be ripping through unvaccinated populations in various countries, the medical consequences for vaccinated individuals infected with the virus are greatly attenuated, such that hospitalization rates are climbing only very gradually among those individuals. Moreover, relative to the last two waves, global deaths remain low and stable in many countries. As a result of these outcomes, we consider the odds of a return to aggressive lockdown measures to be quite remote. In the United States, for instance, infections are rising most rapidly in states that have generally been hesitant to restrict movement and economic activity. In other countries, like Canada, very high rates of vaccination are likely to inoculate against a return to widespread mobility restrictions. And, in many other countries where vaccination rates lag those of Canada and other highly vaccinated nations, economic data remain robust and leave those countries in better shape to deal with mobility restrictions than earlier in the pandemic.

Our forecasts this month thus, by and large, represent tweaks to our earlier views, largely reflecting the incorporation of incoming economic data which have generally, but not uniformly, been on the stronger side of expectations. In Canada, for example, we kept our forecast at 6.1% in 2021 but raised it a touch to 4.1% in 2022. This captures slightly less robust growth at the tail-end of Q3 and early in Q4 as we incorporate a very small impact of the Delta variant in the fall, but that is offset by stronger growth before and after that. Even developments in credit markets are broadly supportive: the decline in longer-term interest rates observed in many countries represents a loosening in financing conditions which are likely to add somewhat to growth despite the fact that some view the drivers of these moves as capturing fears about the outlook. Outside the US, the risk-off appreciation of the US dollar is pushing currencies below their fundamental values, adding to the growth impulse coming from lower interest rates.

In the Pacific Alliance Countries, the impacts of the virus and political/social developments are largely offset by the strength of the domestic economy which has benefitted from re-openings, much stronger-than-anticipated commodity prices, and the associated robust global recovery. In some countries, like Chile and Mexico, the rebound and the inflationary consequences of higher commodity prices and exchange rate movements have led central banks to tighten policy well ahead of other countries.

Our view on rates in the US and Canada remains largely unchanged. We continue to expect that the Federal Reserve will raise its policy rate in the first half of 2023 and are heartened to see that the Fed shifted its dot plots in that direction since our last forecast was published. In Canada, we still forecast that Governor Macklem will raise interest rates in July 2022, and his recent decision to taper asset purchases provides greater confidence on that front. In both countries, as is the case in many other nations, the key challenge for policymakers beyond the immediate impacts of COVID remains the lack of certainty regarding the future path of inflation. Though inflation remains well above target in Canada and the US—reflecting a combination of base effects and a large number of supply chain challenges—it still appears to be more likely that the current surge in inflation reflects temporary rather than more persistent factors. The recent declines in the price of key commodities is a significant data point in that assessment, but there is no question that uncertainty around the inflation outlook is historically high.


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