Canadian Quarterly Economic Forecast

Global

• COVID-19 continues to be the primary driver of forecast revisions to the global economic outlook. Europe has handled the wave of the highly infectious Delta-variant relatively well, outperforming expectations in the first half of the year. In contrast, emerging markets with insufficient vaccine-access and healthcare infrastructures have been devastated by its effects. The COVID threat on the EM economies will persist within the near-term forecast, as the COVAX facility anticipates that it will fall short by more than 500 million doses relative to their end of 2021 delivery target.
• Compared to our June forecast, we have revised down global growth to 5.9% (6.2% previously) in 2021. The forecast for growth in 2022 is unchanged at 4.7%.
• The downward revision is partly a product of the spread of COVID-19 in Asia. China continues to pursue a zero-tolerance strategy that is forcing regional lockdowns, while South-East Asia struggles under the weight of high infection rates and the related economic disruptions. The forecast was also marked down to reflect a U.S. expansion that has underperformed high expectations. By comparison, the Eurozone proved more resilient than expected in the first half of the year, as climbing vaccination rates are allowing many countries to opt for alternative strategies to lockdowns, such as vaccine or “green” passports. Ongoing re-opening alongside persistent vaccine uptake should support growth through the rest of the year in the common currency area. The U.K. has pushed ahead with reopening, and despite hiccups from supply and labor shortages, 2021 is poised for solid growth.

United States 

• The downward adjustment to the U.S. outlook does not negate a solid rebound for 2021 of 5.6%. 
• Looking ahead to 2022, growth is expected to follow through at a solid 4.1% clip as more activities normalize as the pandemic recedes. Continued above-trend growth in 2023 is expected to drive the unemployment rate slightly below its pre-pandemic low to 3.4% enabling rate hikes by the Federal Reserve. 
• There is still a high degree of uncertainty around this forecast. Downside risks stem from the ongoing uncertainty created by the path of the virus and variants, along with the possibility that supply-side constraints could weigh more heavily on production and consumption. On the upside, Americans have built up a substantial cash cushion, which could drive spending higher than we assume.
• Fiscal policy presents both upside and downside risks. We assume Congress passes the Infrastructure Investment and Jobs Act, which is a mild positive through the forecast. Any misstep here would therefore present a modest disappointment. On the other hand, Democrats have even larger plans for social spending, funded by tax increases. This has not been factored into the forecast, which could present a boost to growth next year depending on the final details.      

Canada 

• The Canadian economy disappointed in the second quarter, contracting for the first time since the pandemic struck in the year prior. Add to this the anticipated impact of the fourth wave, where provincial governments are unlikely to press on re-opening plans over the fall/winter months. Canada is also prone to the same supply chain disruptions that are impacting other countries. The combination of all three factors leads to a more protracted recovery, with GDP revised down to 4.9% (from 6.2%) in 2021. 
• The pause in reopening in the near-term will shift the growth patterns into 2022, as the fourth wave ebbs and supply chain constraints ease. Past gains in income, employment, and savings should fuel stronger growth in consumption and business investment next year. In addition, firms will continue to rebuild inventories. Despite this, our 2022 forecast remains unchanged at 4.4% for the annual average due to the markdowns in the second half of 2021. However, the pattern through next year on a fourth-quarter to fourth quarter basis captures an acceleration to 4.6%.     

Financial 

• We anticipate the Federal Reserve (Fed) and the Bank of Canada (BoC) will maintain the current low rate environment until the final quarter of 2022. At that point, both central banks are expected to initiate rate hiking cycles, with the Fed and BoC policy rates eventually reaching 2.00% and 1.75%, respectively by 2024. 
• Over the coming quarters, we have government yields continue to rise. We believe this rise will be driven by three factors: First, markets will continue to solidify a higher policy path for the Fed and BoC. Second, both central banks will end net-new bond purchases over the coming quarters. Third, lingering inflation will cause investors to demand higher compensation for inflation risk. Though this narrative has been our base case for some time, market pricing has focused on the negative impact of the Delta variant and not the expected growth recovery. Once we get past the current uncertainty, higher bond yields should materialize.  
• The upside for major currencies is limited versus the US dollar. The Canadian dollar is at fair value based on the BoC policy path and commodity prices. After a stronger initial recovery, we are expecting an economic deceleration in the Euro Area and Japan, which should weigh on these currencies. We are also less optimistic on emerging market currencies relative to the USD due to the disproportionate impact of the pandemic on these economies.