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Bank of Canada Governor Tiff Macklem takes part in a news conference in Ottawa, Dec. 15, 2020.


Bank of Canada Governor Tiff Macklem warned that the second wave of the COVID-19 pandemic could temporarily throw the economy into a “modest” decline in the first quarter of 2021, but said that the arrival of vaccines suggests a recovery is on the horizon.

“Near term, rising COVID-19 infections will dampen growth and could even deepen our economic hole,” Mr. Macklem said in a speech via video-conference Tuesday to the Greater Vancouver Board of Trade.

In a question-and-answer session following his formal remarks, Mr. Macklem said that second-wave containment restrictions “will certainly weigh on growth in the first quarter,” adding that “the economy could even slide backwards.”

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“We said from the beginning that this would be a long recovery, it would be choppy and it would be uneven,” he said. “This second wave is certainly going to put a chop in that recovery.”

Bank of Canada governor Tiff Macklem says earlier-than-expected arrivals of vaccines, coupled with rising COVID-19 case counts, will mean a mixed bag for the economy in 2021. The Canadian Press

On the other hand, Mr. Macklem said, “the arrival of new, effective vaccines is a tremendously positive development” for prospects for the economy as 2021 progresses.

“It really puts a timeline, gives us more certainty, about when we can start to get back to more normal activities. It really reinforces, we are going to get out of this.”

Mr. Macklem’s remarks follow the release last week of the Bank of Canada’s final monetary policy decision of 2020 – a year of economic crisis in which the bank slashed its key interest rate to 0.25 per cent from 1.75 per cent, and implemented its first-ever quantitative easing (QE) program involving large-scale purchases of government bonds. The bank left its rate and QE program unchanged, as it continues to assess the economic implications of the second wave of the pandemic in the near term, and the earlier-than-expected rollout of vaccines beyond that.

The bank won’t issue fresh economic projections until next month, when it publishes its quarterly Monetary Policy Report. In a news conference following his speech, Mr. Macklem said that, based on what the bank knows now, the first quarter looks destined for either very little growth or a “small” contraction.

“If it’s positive, it’s likely going to be a small positive; if it’s negative, I think it will be a relatively modest negative. We’re not talking anything like the second quarter [of 2020],” he said, referring to the plunge in the economy in the initial wave of the pandemic last spring.

Mr. Macklem’s speech focused on strategies for accelerating Canada’s international trade in the postpandemic recovery. In both the address and his comments afterward, the governor noted that the recent rise in the Canadian dollar against its U.S. counterpart – a function chiefly of a broad-based decline of the U.S. currency globally – does pose a near-term obstacle for Canada’s exports to its biggest market.

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“There’s no question, this appreciation of the [Canadian] dollar is, on the margin, making our exporters less competitive,” he said. “It’s material. It’s on our radar screen.”

In his speech, Mr. Macklem called on government and business to work together to tackle Canada’s chronic productivity and competitive weaknesses, saying that this is critical to delivering the trade growth and investment that the country will need for a full and healthy recovery.

“We won’t be able to fully capitalize on our opportunities unless we take steps to improve our productivity and competitiveness,” he said.

He urged business leaders to take the leap and accelerate their investment in equipment, research and development, and training to help achieve this. He argued that the Bank of Canada’s low-interest-rate commitment – it has pledged to keep its key rate at the current record low of 0.25 per cent into 2023 – presents a borrowing climate for businesses to do just that.

“This seems an opportune time for companies to look at how they judge the rate of return on potential investments – the so-called hurdle rate. Taking a longer-term approach to capital investment could unlock a myriad of viable growth opportunities,” he said.

Mr. Macklem also called on federal and provincial leaders to apply the “tremendous co-operation” forged in the COVID-19 crisis to addressing interprovincial trade barriers – something the central bank has long identified as a key impediment to the country’s economic efficiency.

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“Think what we could achieve if that same spirit of co-operation was applied to removing barriers to the movement of goods, services and professionals across provincial borders,” he said.

He also urged governments to invest in improving the country’s trade infrastructure – specifically highlighting the need to upgrade the country’s ports and its digital-information capacity.

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