Canada's economic recovery falters amid renewed COVID-19 restrictions

BENGALURU: Canada's economy will hit a major roadblock during the first quarter of 2021 before gaining momentum in the next quarter, according to economists in a Reuters poll who said the country's GDP would reach its pre-pandemic growth levels within a year.

Although economic activity had recovered partially from a record drop - 7.5% in Q1 and 38.1% in Q2 - in the first half of 2020, it took another hit after a resurgence in coronavirus infections led to renewed tight containment measures.

The Jan. 11-18 Reuters poll of over 40 economists predicted the economy, which grew a record annualized 40.5% in the third quarter of 2020, expanded 3.8% in the fourth quarter, a third consecutive downgrade.

It was expected to grow just 0.7% this quarter - the weakest since polling began for that period in October 2019, with five of 18 contributors predicting a contraction.

"With cases and hospitalizations surging across Canada, the second wave of the pandemic threw a bucket of cold water on the economic recovery. Many businesses already weakened by the first bout of the crisis will find it harder to survive the second wave," said Ksenia Bushmeneva, economist at TD.

"While the eventual ramp up in vaccine distribution offers hope of a strong economic rebound in the second half of the year, the economy is entering 2021 on a wobbly footing and could suffer a modest contraction in the first quarter."

Despite expectations for a solid recovery from next quarter - primarily backed by vaccine optimism - the economy was forecast to grow 4.4% in 2021, the weakest prediction for the year since January 2020.

Still, nearly 70%, or 16 of 23 economists who replied to an additional question said Canadian GDP would reach pre-COVID-19 levels "within a year." Five said "within two years" and two said "two or more years."

"We expect Canadian GDP growth will pick up in Q2 and the following quarters as vaccine distribution ramps up, allowing for a more sustained easing in containment measures as 2021 progresses," said Josh Nye, senior economist at RBC Economics.

Meanwhile, the unemployment rate, which edged up in December to 8.6%, was expected to slow to 7.0% and 6.2% by end-2021 and end-2022, respectively. If realised, that would still be above the pre-COVID-19 levels of around 5.5%.

All 21 economists who answered another question said inflation would either pick up significantly or stay around the same as last year, but poll median showed inflation would average 1.7% and 1.9% this year and next, respectively, below the Bank of Canada's target of 2.0%.

"While weak demand due to a worsening health situation should keep price pressures in check, we still expect a temporary acceleration in year-over-year inflation," said Tony Stillo, director of Canada economics at Oxford Economics.

"However, the BoC will look through temporary bouts of higher inflation and keep monetary policy accommodative."

The central bank - which cut its key interest rate by a cumulative 150 basis points last year and implemented its first-ever quantitative easing program - was expected to hold the overnight rate at 0.25% through to end-2023 at least.

That was despite money markets seeing an increased chance of a less than 25 basis point cut by the BoC, which is scheduled to meet on Jan. 20, as restrictions continued to impact the recovery.