- In today’s economic progress report, Bank of Canada Deputy Governor Timothy Lane reviewed the impact of the pandemic over the last 15 months, focusing on the resiliency of the economy in recent quarters. He noted that while annualized GDP growth in the first quarter was below the Bank’s expectation in the April Monetary Policy Report (MPR) at 5.6% (MPR: 7%), underlying details of the report were encouraging and indicated “rising confidence and resilient demand.” The Bank expects close to 3.5% growth in the second quarter. Despite expectations of solid growth, the Deputy Governor also noted that employment has a long way to go in its recovery, especially in the hardest hit sectors of the economy.
- Deputy Governor Lane spent much of his remarks exploring the acceleration of digitalization during the pandemic. He said digital technologies helped sustain economic activity over the last year, and that the digital sector grew by 3.5% even though the entire economy declined by about 5% in 2020. This has changed the type of jobs available and firms appear to be speeding up their adoption of digital technologies. This could make the labour market adjustment process challenging as Canada emerges out of the pandemic due to skill mismatches.
- The increased use of digital technology during the pandemic is resulting in less damage to the Canadian economy’s potential than what the Bank had initial feared. The digital transformation has also boosted the bank’s estimate of productivity growth, indicating that the “economy has more room to grow before inflation becomes a worry.”
- Turning to yesterday’s policy decision, the Deputy Governor said the Canadian economy is largely evolving as expected in the April MPR. While inflation came in above 3 percent in April, the Bank expects it to remain around that rate for the next several months before moderating as transitory shocks fade. He noted they are watching cost pressures from supply chains closely as it is a risk to the forecast. Taking this and growth developments into consideration, the Governing Council judged that extraordinary monetary policy support was still needed. Still, Deputy Governor Lane pointed out that if the recovery is in line or stronger than the Bank’s latest projection, there will be less need for QE stimulus. Reopening of provincial economies over the coming weeks will inform the Bank’s assessment.
Key Implications
- In today’s remarks, Deputy Governor Tim Lane mostly delivered a feel good story on the Canadian economy so far through the pandemic. The Canadian economy is recovering well, supported by a digital transformation that helped sustain economic activity through several waves of the pandemic.
- Still, there are challenges, particularly in how the labour market adjusts to the increased adoption of technology. Some jobs are likely to become redundant. This could create excess slack in the economy, and monetary policy should be supportive as this slack is absorbed.
- The Bank still sees this occurring sometime in the second half of 2022, but as Lane noted, the pace of asset purchases could be wound down faster if the reopening boosts the economic recovery faster than expected. If all goes well, the next few weeks could set us up for further tapering as soon as July.
