As Covid infections rise, economy shrugs off risk

Amid a raging third wave of the Covid-19 pandemic, the economy is facing its share of risks —but those risks are to upside, according to a report from Scotia Economics.

While Covid-19 infections are resurgent, resulting in stepped-up public health restrictions, the economy continues to outperform expectations, leading the bank to raise its forecasts.

For Canada, the firm has bumped up its forecast for GDP growth in 2021 to 6.4% from 6.2%, and its 2022 forecast has edged up to 4.1% from 4.0%. Scotiabank cited “the strength of incoming data, solid growth prospects in the U.S., and higher commodity prices […].”

The bank also now sees output returning to its pre-pandemic level during the summer.

“The speed of this recovery is nothing short of exceptional given that many forecasters (including us) had earlier called for an early- to mid-2022 return to pre-pandemic activity,” it said.

Within this headline strength, Scotiabank said that a K-shaped recovery “is still very much at play as the pandemic continues to weigh on Covid-affected sectors of the economy, while almost every other sector is doing substantially better.”

In the U.S., the recovery is also robust, leading the bank to raise its U.S. forecast for 2021 to 6.6%, up from 6.3%.

“Our revision mostly reflects the strength of incoming data though we are also currently including about half of President Biden’s infrastructure plan,” Scotiabank said. “As a result, the risks to our forecast are tilted to the upside given the likelihood that significantly more fiscal spending occurs in the next few years [more infrastructure and other planned announcements].”

This brighter outlook, and further upside potential, comes “despite a vicious phase of the pandemic and tighter-than-expected containment measures in many countries,” the report noted.

“From an economic perspective, it has been very reassuring to observe the economy’s resilience in the face of the virus’ evolution despite the very heavy human cost of the pandemic. We anticipate this divergence in economic and public health outcomes will last,” it added.

Given the strong recovery, Scotiabank said the Bank of Canada is seen raising interest rates in the third quarter of 2022, with the U.S. Federal Reserve not moving until the first quarter of 2023.

The BoC is expected to act ahead of the Fed, “owing to higher inflation and markedly better labour market outcomes in Canada,” the report said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.