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Bank of Canada sees economy shrinking in first quarter as second wave delivers ‘serious setback’

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“As the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required,” thepolicy statement said. “We remain committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”

The Bank of Canada was feeling relatively good about the economy’s momentum in October, but the second wave of COVID-19 lockdowns has forced it to revise its outlook. It now predicts the economy’s climb back to its pre-pandemic level will be interrupted by a contraction of 2.5 per cent in the first quarter of 2021 after ending 2020 at an annual rate of growth of 4.8 per cent.

Overall, the central bank predicts the economy will grow four per cent in 2021, compared with a previous estimate of 4.2 per cent. The estimates are roughly the same because vaccines were approved much faster than the Bank of Canada thought possible when it last published a forecast in October, so it assumes broad immunity over the course of the year will more than offset a tough winter. It predicts growth of 4.8 per cent in 2022 and an increase in gross domestic product of 2.5 per cent in 2023.

“Canada’s economy had strong momentum through to late 2020, but the resurgence of cases and the reintroduction of lockdown measures are a serious setback,” the central bank said in its policy statement.

“Assuming restrictions are lifted later in the first quarter, the Bank expects a strong second-quarter rebound,” policy-makers added. “Beyond the near term, the outlook for Canada is now stronger and more secure than in the October projection, thanks to earlier-than-expected availability of vaccines and significant ongoing policy stimulus.”

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