Canadian Quarterly Economic Forecast

Global

• The outlook for the near-term is getting brighter. The post-holiday surge in COVID-19 cases has subsided and most countries are easing restrictions. Widespread vaccine distribution combined with additional policy support within some advanced economies (AEs) will continue to support economic momentum in the second half of this year.
• Relative to our March forecast, we have marginally revised up global growth to 6.2% (6.0% previously) in 2021, with little change to the 2022 outlook of 4.7% growth.
• The upward revision is powered by advanced economies, led by the U.S. Across the Atlantic, the UK’s successful vaccination program has allowed it to reopen faster than most AEs. The Eurozone’s slow start to vaccinations has proved temporary. An accelerating rollout should result in a peak in economic growth in the third quarter as reopen strategies broaden and cross-border travel becomes easier. Meanwhile, some of the non-major EMs are benefiting from relatively little restrictions, rising commodity prices, recovering global trade and accelerated vaccinations thanks to the COVAX facility. On the other side of the ledger, growth in some of the major EMs – such as China and India – has been revised down.
  
   

United States 

• The U.S. economy has raced ahead faster than we expected in March, resulting in a sizeable upgrade to GDP growth this year to 6.9%, from 5.7% in our March forecast. Part of this upgrade reflects the incorporation of additional pandemic-relief government measures, and also the lifting of business restrictions roughly one-quarter ahead of our prior expectations. This has positioned the consumer as the main source of outperformance so far in 2021.
• Looking ahead to 2022, more fiscal measures are likely to come down the pipeline. The Biden administration is determined to enact a material infrastructure package, leading us to include $800 billion in spending over the next ten years in the forecast. The amount is likely to fluctuate as Congress continues to hammer out a deal, but we suspect this amount helps mitigate a baseline forecast with lopsided risks. Other measures in the American Jobs and Family plans have not yet been incorporated, due to less line of sight on timing and scope.
• The combination of stronger growth and more government spending corresponds with lower unemployment and faster inflation in the forecast. The surge in demand in recent months has come faster than supply can adjust in many sectors, leading to hefty price hikes for many goods and services. While many of these dislocations will ultimately ease, it will take time. However, even as this occurs, we still expect inflation pressures to hold above the 2% threshold because the economy will be firmly in excess demand. This has motivated our call for a gradual rate hike cycle to get underway by the end of next year.   

Canada 

• We have revised up the Canadian GDP forecast slightly to 6.1% (from 6.0% previously) in 2021, and to 4.4% (from 3.9%) in 2022.
• Despite the third wave of the pandemic weighing on activity in the second quarter, the economy was more resilient in earlier months of the year. The reopening of provincial economies is now well underway and will accelerate the recovery in spending and employment in the latter half of the year. 
• Fiscal stimulus introduced in the spring federal and provincial budgets is also now captured within the forecast and offers another source of economic lift over the next two years. This is primarily reflected in higher household and government expenditures. 
• Lastly, stronger growth south of the border will lead to healthier gains in Canadian exports through the second half of this year and in 2022.
• As the Canadian economy re-opens, Canada will not likely escape the inflationary pressures that are already evident south of the border. We expect a parallel theme to unfold, with price pressures from temporary demand-supply mismatches giving way to more fundamental demand drivers in 2022. This should position the Bank of Canada to raise interest rates towards the end of that year.   

Financial 

• With an upgraded economic outlook pushing the unemployment rate below 4% and core inflation still running around 2.5%, we expect the Federal Reserve to begin lifting the federal funds rate in the final quarter of 2022. 
• As we move closer to the first rate hike, market pricing should adjust, lifting government bond yields. The forecast reflects a US Treasury 10-year yield reaching 2% by the end of 2021. 
• The Bank of Canada (BoC) is in a similar position, but it has been more willing to preemptively adjust policy. We forecast that the BoC will continue to reduce its weekly asset purchase program in the coming months and start to raise its policy rate in the final quarter of 2022. 
• Upside for major currencies against the U.S. dollar is relatively limited. While the euro and the pound are trading below long-term fair value and have some room for appreciation, commodity-producing currencies, such as the Canadian, Australian and New Zealand dollars, have pushed above fair value compared to the USD. Any further advance of these currencies would require another leg up in commodity prices, which we do not anticipate.