The next couple of weeks will be critical for the recovery, as a resurgence of Covid-19 infections in the U.S. is weighing on economic activity, says BMO Capital Markets.
In a new report, the bank’s economists said that they continue to expect a 5% to 6% drop in GDP for both Canada and the U.S. this year, followed by a “sizeable rebound” in 2021.
“Substantial fiscal policy support, rock-bottom interest rates, and improved financial conditions should aid the recovery, though its fate ultimately hinges on the course of the pandemic,” it said.
On that front, the rise in infections in the U.S. appears to be undermining the initial signs of renewed growth. This represents a downside risk to the outlook, BMO said.
And while Canada has done a better job controlling the virus, it’s not out of the woods yet either.
“[Canada] is seeing some regional increases, as are several other countries (Spain, Japan, Australia) that previously had the outbreak under control,” it said.
“The next few weeks will be a crucial test for the recovery,” the report said.
“If restrictions on consumer and business activity are limited to mostly indoor dining, bars, and gyms, then the recovery should move forward, albeit at a slower pace than in the reopening phase,” said BMO. “However, if restrictions are applied more broadly and consumer spirits head south, the recovery will be at risk.”
As long as the pandemic remains a threat to public health, it represents an ongoing risk to economic activity too.
BMO noted that there are already over 20 Covid-19 vaccine candidates in advanced clinical trials around the world — and while it’s hoped that a safe, effective vaccine will be available by the end of the year, there’s no guarantee.
Against this backdrop, BMO said that the central banks on both sides of the border are expected to keep interest rates near zero until at least 2023, and that fiscal policy will remain supportive too.
There are other key issues for the recovery alongside the pandemic, it noted, including renewed tensions between the U.S. and China, and the U.S. election.