On October 30, Statistics Canada reported that the pace of economic growth in Canada slowed in August as real gross domestic product grew 1.2% in the month. The rise compared with a revised 3.1% gain in July. The report came as the agency also released a preliminary estimate for a gain of 0.7% in September to bring growth in the third quarter to about 10%. Economists on average had expected an increase of 0.9 per cent for August, according to financial data firm Refinitiv.

TD Bank senior economist Sri Thanabalasingam said Canada’s economic recovery is losing steam as it moves into the recuperation phase, where additional gains will be harder to come by. “Navigating through the turbulence will not be easy as much will depend on the course of the virus. Getting the spread under control could right the ship, but seas will remain choppy without a vaccine or effective treatment. Calmer waters are still a long way away for the Canadian economy. ”

Cases of COVID-19 have been rising in recent weeks leading to increased restrictions on businesses in some areas of the country, however the rules have not yet returned to levels seen in the spring when non-essential businesses were forced to close.

Bank of Montreal chief economist Doug Porter said the way forward has been deeply clouded by the second wave and renewed restrictions, so growth will cool considerably in the fourth quarter. “However, we suspect that with ongoing massive fiscal support, less restrictions than earlier, and, simply, that consumers and businesses have learned to operate in this new environment, the late-year setback should be relatively mild. In fact, we continue to expect modest growth overall for Q4,” Porter wrote.

The growth in August came as goods-producing industries rose 0.5% and the services industries climbed 1.5% as overall 15 of 20 industrial sectors posted increases and two were essentially unchanged in August. The public sector grew 1.9% in August, as all three components rose. The arts, entertainment and recreation sector climbed 13.7%, while accommodation and food services rose 7.3% August. The manufacturing sector added 1.2%. Statistics Canada said overall economic activity for August was still about 5% below the pre-pandemic level in February.

The Bank of Canada is setting up to run a high-pressure economy until at least 2023, a delicate operation that will require lots of tinkering along the way.

Bank of Canada Holds Rate Steady, Says COVID-19 Economic Recovery Likely by 2022
During the week of October 25, policy-makers reiterated their commitment to ultra-low interest rates for an unusually long period, but added some tweaks as the central bank’s staff produced a glum outlook that suggests we will be coping with the legacy of the COVID-19 crisis for years.

Central banks around the world have insisted for months that the fight against the economic effects of COVID-19 will require more than low interest rates, a call heard in Ottawa, where Prime Minister Justin Trudeau is overseeing one of the world’s most generous support programs. “Prudence a generation ago meant deep cuts to public spending,” Finance Minister Chrystia Freeland said in a speech on Oct. 28, referring to the debt crisis in the mid-1990s. “Today, it means we support our people and businesses as they battle this pandemic, then move beyond it, and ultimately thrive in the recovery that will follow.”

Much of what the Bank of Canada is doing to revive the economy is unprecedented, so it shouldn’t be a surprise that adjustments will be needed from time to time. Policy-makers decided during their latest deliberations that they should be even more explicit about how long they plan to keep the benchmark rate at 0.25%, which is as low as they think it can go without disrupting the financial system.

The central bank also rejigged its bond-buying program. It will now favour Government of Canada bonds that mature in three or more years, an acknowledgement that the central bank might have been inadvertently depriving investors of popular, low-risk securities that allow financial markets to function smoothly. Now, the challenge is coaxing the economy back to full health, which will require keeping downward pressure on mortgage rates, credit lines and corporate bond yields.

The central bank’s new economic outlook predicts the economy will contract 5.7% this year and then grow 4.2% in 2021. “As the economy recuperates, it will continue to require extraordinary monetary policy support,” the Bank of Canada said in a new policy statement.

Previously, the central bank said it would keep the key interest rate pinned near zero until the two-per-cent-inflation target was “sustainably achieved.” The new statement explicitly states that the current forecast suggests policy-makers won’t achieve their inflation goals “until into 2023,” giving the public something it can put in a calendar.

Central banks generally prefer a certain amount of fuzziness, given how easily economic conditions can change. In this case, policy-makers decided that by erasing the risk of a surprise spike in borrowing costs down the road, they will be able to induce more executives and households to borrow money to invest and spend.

The central bank now estimates that gross domestic product grew at an annual rate of almost 50% in the third quarter, much faster than the rate of about 30% it predicted in July. But growth has dramatically decelerated because industries such as hospitality and tourism have been largely excluded from the rebound due to social-distancing requirements. The central bank’s new forecast predicts an annual growth rate of only 1% this quarter, and assumes that GDP won’t return to pre-pandemic levels until 2022. The forecast has inflation at only 1.8% at the end of 2022, still shy of the central bank’s target.

More troubling are the central bank’s updated estimates of potential growth, which serve as its best guess on how fast the economy can expand without putting too much upward pressure on prices. The “scarring” effects of extended unemployment and depressed business investment forced the Bank of Canada to drop its potential output estimate to 0.9% in 2021 and 1.1% in 2022, compared with previous estimates of 1.8% and 1.9%, respectively. That means the crisis has lowered Canada’s ceiling for growth, because inflation will heat up faster in an economy that has limited capacity to keep up with demand.

“With COVID, not only is the recovery going to take longer, there are more chances there will be scarring,” Carolyn Wilkins, the Bank of Canada’s senior deputy governor, said at a press conference. “We do expect the economy to get back on track, it’s just going to take time, and we’ll get back to a lower level than we would have had (if not for) COVID.”

Source: Toronto Star
Source: Globe and Mail
Source: Financial Post
Source: Toronto Star
Source: Financial Post
Source: Globe and Mail