Recovery will hit pot holes in 2021, Bank of Canada says

Interest rates frozen as report says economy shrank by 5.5% last year

OTTAWA—THE economy will go in reverse for the first quarter of 2021, the Bank of Canada said Wednesday as it kept its key interest rate on hold, warning the hardest-hit workers will be hammered again on a path to a recovery that rests on the rollout of vaccines.

Workers in high-contact service industries will carry the burden of a new round of lockdowns, which the central bank warned will exacerbate the pandemic’s uneven effects on the labour market. The longer restrictions remain in place, the more difficult it may be for these workers to find new jobs since the majority move to a new job but in the same industry.

Bank of Canada governor Tiff Macklem said in his opening remarks at a late-morning news conference that the first-quarter decline could be worse than expected if restrictions are tightened or extended.

The central bank kept its key rate on hold at 0.25 per cent on Wednesday, citing near-term weakness and the “protracted nature of the recovery” in its reasoning.

The short-term pain is expected to give way to a brighter outlook for the medium-term with vaccines rolling out sooner than the central bank expected.

Still, the bank said in its updated economic outlook, a full recovery from COVID-19 will take some time.

Nor does the Bank of Canada see inflation returning to its two per cent target until 2023, one year longer than previously forecast, and the bank’s key rate is likely to stay low until then.

Overall, there is reason to be more optimistic about the economy in the medium-term, but it will still need extraordinary help from governments and the central bank to get there, Macklem said.

The bank’s latest monetary policy report, which lays out its expectations for economic growth and inflation, estimates that COVID-19 caused the economy to contract by 5.5 per cent last year.

Despite an upswing over the summer and fall that may have spared the country from a worst-case economic scenario, the drive to a recovery will hit a pothole over the first three months of 2021.

The bank forecasts real gross domestic product to contract at an annual pace of 2.5 per cent in the first quarter of 2021, before improving thereafter if severe restrictions start easing in February.

Trevin Stratton, chief economist at the Canadian Chamber of Commerce, was more dour on lockdowns, saying the group doesn’t expect them to ease until well into March.

“During this period, we need to provide the right kind of support to individual Canadians and to businesses to get them through the lockdowns, recognizing that neither group is in the same financial position as it was in March 2020,” he said in a statement.

The bank said the path for the economy will be like riding a roller-coaster as resurgence in COVID-19, or new, more virulent strains, weigh down a recovery in one quarter before leading to strong upswing in the next.