Get ready for a temporary decline this quarter in the Canadian economy and for key interest rates to rise 75 basis points this year, economists for major banks predicted Wednesday.
The omicron variant of Covid-19 “has thrown [a] huge curveball” at the economic outlook for the first quarter of 2022, said Douglas Porter, managing director and chief economist for BMO Financial Group.
“We suspect that the economy will hit about a two-month air pocket due to new restrictions,” Porter said Wednesday during Economic Outlook 2022, a virtual event hosted by the Economic Club of Canada.
“I believe the economy is going to struggle to see any growth at all in the first quarter. If you recall during the third wave, we saw an outright decline in the economy in the second quarter of last year and I would not be shocked if we get a repeat of that in the first quarter of this year,” Porter said during a panel discussion featuring economists from major Canadian banks.
In the United States, omicron accounted for 95% of new coronavirus infections last week, the Associated Press reported, quoting the Centers for Disease Control and Prevention.
On this side of the border, several provinces are delaying students’ return to classrooms, and Ontario has reinstated a ban on indoor restaurant dining and forced cinemas, gyms and theatres to close.
“As restrictions ease — and presumably they will in relatively short order — the economy can spring back with purpose,” Porter said Wednesday.
Overall, Porter predicted the Canadian economy would grow by 4% in 2022, after growing by 4.5% in 2021.
“A so-called normal year for the Canadian economy would be about 2% growth or so, but even with a relatively strong rebound through the second half of , we don’t think we will be completely back to normal by the end of this year,” said Porter.
“When we look out into 2023, we think that year will see somewhat above-average growth.”
There is a lot of “ground to make up” in the Canadian economy, said Porter. In 2021, several factors put downward pressure on the economy — among them, supply chain issues in the auto sector and a drought in Western Canada.
Two of Porter’s co-panelists predicted central banks — both in Canada and the United States — would tighten monetary policy early in 2022.
Avery Shenfeld, managing director and chief economist for CIBC Capital Markets, said both the Bank of Canada and the Federal Reserve will raise interest rates by 75 basis points this year, “with a follow-up dose of somewhere between 75 and 100 basis points in 2023.”
“We think monetary policy will be tighter as we go through the course of this year,” said Dawn Desjardins, vice-president and deputy chief economist at RBC.
By the end of 2023, the U.S. Federal Reserve will have raised its policy rate by 1.5 percentage points, suggested Desjardins.
“Even with all of the uncertainty the economy is facing with omicron right now, we are of the view that the Bank of Canada will start to raise interest rates in April,” said Porter.
“Usually when [the Bank of Canada believes] it’s time to start raising interest rates, they don’t fool around. They tend to move very quickly,” said Porter. “I would look for three moves in a row when they do begin raising interest rates in April.”