BoC's Macklem: Economic volatility looming for Canada's economy

The positive economic impact of COVID-19 vaccinations will take some time to become apparent

BoC's Macklem: Economic volatility looming for Canada's economy

Bank of Canada Governor Tiff Macklem has warned that despite the arrival of COVID-19 vaccinations, the nation’s gradually recovering economy could slow again in the wake of the second wave of infections.

While the roll-out of the inoculations offers hope for a return to relative normalcy some time in 2021, Macklem said in a December 15 speech that “the path from here to there looks difficult.”

“Near term, rising COVID-19 infections will dampen growth and could even deepen our economic hole… I don’t want to downplay these difficulties,” Macklem said. “So far, household spending has led the way. But for the economy to fully recover, it needs to be firing on more than one cylinder.”

Macklem stressed that this recovery must broaden to include exports and business investment if it is to become sustainable. Federal government policies should also pay attention to the services sector, which has been disproportionately affected by the pandemic compared to goods.

“Overall, services haven’t recovered, even as goods have rebounded,” Macklem said. “Services exports are only about a quarter of the size of goods exports. But services exports had been growing much more quickly than goods exports before the pandemic.”

Emblematic of this is the situation in British Columbia, which saw its tourism industry – particularly its education exports sector – essentially grind to a full stop this year.

“When a foreign student comes to Canada to study, the tuition counts as an export of education services,” Macklem said. “Before the pandemic, this was a large and fast-growing activity. In 2019, educational services exports were almost $14 billion, an increase of 67% from 2015.”

Fortunately, Canada’s international-facing trade market is well-positioned to make up for any slack in other industries

“Since the initial shutdowns last spring, trade has bounced back faster than many economists had predicted,” Macklem said. “Recent international surveys suggest executives expect trade to be strong in 2021. And the news of effective new vaccines puts a more certain timeline on the resurgence of global demand.”