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April 21, 2021BANK OF CANADA MONETARY POLICY The Bank of Canada will hold rates at the effective lower bound with the overnight target rate at 0.25%, the Bank Rate at 0.50% and the deposit rate at 0.25%. Reflecting the progress made in economic recovery, the Bank is adjusting its quantitative easing program with the weekly net purchases of Government of Canada bonds lowered to a target of $3 billion effective April 26, 2021, from the previous target $4 billion.
Economic activity has been stronger than anticipated in recent months supported by consumers and businesses adopting to the new ways of operating under health measures. In addition, the COVID-19 vaccine rollout is progressing faster than previously expected in some countries providing further support.
However, the third wave of infections and lockdowns are negatively impacting the economic recovery in a number of regions including Canada. While the impact of the third wave is expected to be temporary, the pace of economic recovery remains dependent on the evolution of the pandemic and the pace of vaccine rollouts. As part of projections assumptions, the Bank of Canada expects broad immunity to be achieved by mid-2021 in the United States, later in 2021 in Canada other advanced economies and China; and in 2022 in other emerging-market economies.
Global Economy
The spread of new COVID-19 variants and the renewed lockdowns combined with continued supply chain problems are weighing on global economic activity. The pace of economic recovery remains considerably uneven across regions with the United States benefiting from a front-loaded fiscal stimulus and rapid vaccination while most other regions are progressing slowly. Following an estimated 2.4% decline in 2020, the Bank of Canada expects global growth in Gross Domestic Product (GDP) to increase to 6.8% in 2021. The global economic growth is than expected to moderate to 4.1% in 2022 reflecting the slowdown in the rebound in activity and the withdrawal of fiscal stimulus.
Compared to the January 2021 Monetary Policy Report (MPR), the Bank has revised up the level of GDP by 1.6% in 2021 and remains 0.5% higher in 2023. Key factors driving up this upward revision includes a stronger than anticipated activity in Q4 2020 and Q1 2021 in almost all regions, and the fiscal stimulus boost in the United States that was announced in December 2020 and March 2021.
In the United States, the strong economic activity has been supported by the $900 billion fiscal package announced in December and the $1.9 trillion American Rescue Plan (APR) approved in March. Consumer and business confidence is increasing with the rapid progress on vaccinations and the easing of containment measures. Robust demand combined with the increases in energy prices, health care fees, shelter costs and base-year effects are expected to increase consumer inflation to close to 3.0% in the near term. Overall, the Bank of Canada projects US GDO to grow by 7.0% in 2021, and slowdown to 4.1% in 2022 and 1.3% in 2023.
Economic recovery in the Euro Area has suffered from the additional lockdowns introduced to limit the spread of new variants and disruptions in semiconductor shortages in the first quarter of 2021. Many governments in the region introduced further fiscal stimulus in response that is expected to support activity throughout the year. The recovery is expected to pick up in mid-2021 with easing of containment measures, vaccine distribution and continued policy support.
Growth in the Chinese economy has slowed in early 2021 partly due to renewed lockdowns in some areas. While domestic demand remains moderate, exports are benefiting from strong global demand for goods. The increase in the vaccine distribution is expected to support growth in 2021, however to a lesser degree compared to other regions as the virus is well controlled and activity is less restricted in China. The Bank of Canada projected Chinese economy to grow inline with the estimates of potential output growth in 2022 and 2023.
Growth is moderating in the emerging market economies as several countries introduced renewed restrictions and have tightened monetary policy to limit the increase in inflation. Vaccine distribution is expected occur more slowly than in advanced countries and restrain the recovery through 2023.
Oil prices are considerably higher compared to the January MPR assumptions as a result of strong global demand and continued supply restraints. The Organization of the Petroleum Exporting Countries and several other major oil exporting countries continued their previous production cuts through April, and agreed to gradually increase output starting in May.
Oil prices have moved higher since October and Canadian oil output has continued to recover, reflecting stronger global growth prospects. Supply reduction have also supported prices with Saudi Arabia cutting oil production for February and March 2021 and other countries maintaining production levels. Agriculture and base metals price indexes have risen since the Fall with demand from China and forestry product prices are rising on continued demand from the North American housing sector.
Canadian Economy
Economic recovery in Canada proved to be more resilient during the second and third waves of infections partly due to the ability of consumers and businesses to adopt to operate within the health measures. Sustained economic growth will be essential to overcome the severe economic impacts of the COVID-19 pandemic, especially on workers and businesses in high-contact service sectors.
Growth is expected to be significantly higher in the first quarter of 2021 compared to the January MPR reflecting fiscal and monetary policy support, strong foreign demand, higher commodity prices and vaccine rollouts. Over the medium term, growth will be supported by additional fiscal stimulus, increased consumer confidence and improved terms of trade. Consumption should recover as restrictions are eased and more job opportunities are created. Canada GDP is projected to grow 6.5% in 2021, 3.7% in 2022 and 3.2% in 2023.
The labour market remains volatile with gains and losses driven mostly by changes in pandemic related restrictions. The tightening of restrictions in April in some regions is expected to create another round of job losses before employment rebounds in the second quarter. The recovery is expected to be slow in high-contact sectors with low-wage workers, women and young people continuing to be the most affected. The Bank of Canada noted that roughly 300,000 additional people would need to be hired to reach the pre-pandemic employment level. This translates to roughly an increase of 475,000 in the number of jobs to return the employment rate to the pre-pandemic levels given the population growth. Despite the decline in the unemployment rate, the share of unemployed people who have been without a job for 27 weeks or more remains elevated. As long-terms of unemployment have been associated with skill erosion and lower attachment to the labour market, continued weakness in the labour market may cause long-term damage.
The Bank estimates that the output gap to be between -3.0% and -2.0% in Q1 2021. The Bank of Canada notes that the pandemic will likely have lasting effect on potential output, but these cannot be estimated with precision and may depend on how long behaviour changes last.
The easing of containment measure, returning consumer confidence, elevated levels of disposable income, and recovery in labour market should support consumption. Consumption is expected to rebound in Q2 2021 with increased spending in high-contact sectors and remain strong through 2023. The Bank continues to assume that households will choose not to spend elevated savings on consumption but rather use them to pay down debt, buy homes or invest. The savings rate is expected to remain elevated and gradually return to somewhat above its pre-pandemic level by 2023. Housing markets are expected to soften gradually from current elevated levels, but demand for single-family homes will outpace supply in 2021 before there is balance and softer price growth in 2022.
Goods exports are expected to strengthen as improved global demand and higher commodity prices offset the negative impacts of the recent appreciation of the Canadian dollar. The strong rebound in the US industrial productions should provide support to the Canadian exports of machinery and equipment, and non-energy commodities. Service exports are expected to rebound strongly from low levels as travel restrictions are lifted but some business travel may not return as technology and behaviour changes could be permanent.
Oil exports are expected to increase moderately over the medium term. Crude-by-oil exports are expected to provide more robust support in the near term until additional pipeline capacity becomes available at the end of 2021.
Excluding oil and gas sector, investment is expected to pickup in 2021 as uncertainty wanes. Investments in digitalization, automation and e-commerce may speed up and be permanent – supporting spending in warehousing and equipment but not retail space.
Following an increase to around 3.0% in Q2 2021, inflation is expected to decline to 2.0% over the second half of 2021. As the impacts of base-year effects from gasoline prices fade, inflation is expected to decline further in the first half of 2022, and hover around 2.0% in the second half of 2022 as economic slack is absorbed.
Inflation outlook continues to be highly uncertain due to the different impacts the virus and restrictions had on various sectors, businesses, and workers. This results in an higher degree of uncertainty about the amount of slack in the economy, and increases uncertainty on inflation projections. The Bank of Canada projection for CPI inflation are 2.3% in 2021, 1.9% in 2022, and 2.3% in 2023.
The next scheduled date for announcing the overnight rate target is June 9, 2021. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on July 14, 2021.
Bank of Canada: Rate Announcement; Monetary Policy Report - April 2021
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