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In the wake of the pandemic’s third wave and increasing grit in certain supply chains, economists with Royal Bank of Canada (RBC) have cut their GDP forecast for this year.

RBC economists now predict 5.1% GDP growth for 2021, down by 1.2 percentage points from their previous forecast. They also lowered their growth forecasts for each province, except Alberta (which remained unchanged).

“Not only did the third wave prove more damaging to provincial economies than we previously anticipated, it now looks like supply chain disruptions will restrain growth in the near term,” the report said.

RBC now expects Alberta to lead the way with 5.9% growth this year, followed closely by British Columbia and Quebec.

Despite the downward revision, RBC said it expects half of the provinces “to fully make up the ground lost last year, [with] three others coming quite close.”

B.C., Nova Scotia, and PEI are “furthest along in their recovery,” it said, while Newfoundland and Labrador lags the other provinces “due to slowing capital investment and oil production.”

Some of the reduced optimism for this year could instead be pushed to next year, and RBC has revised its growth forecast for 2022 to 4.3% from 4.0%.

“Massive vaccination campaigns have been hugely successful — Canadians now boast some of the highest vaccination rates in the world — allowing provincial governments to ease restrictions and let high-touch industries reopen more fully this summer,” the RBC report said, adding that measures such as vaccine passports “should make high-touch activities safer and more resilient as the fourth wave takes hold.”

As restrictions ease, “we expect Canadians from across the country to spend more after adding massively to their savings since the start of the pandemic,” the report said.

However, in the face of this pent-up demand, businesses are also facing labour shortages that are restricting capacity, even as public health restrictions loosen. For instance, “Employers in the hospitality, retail and health care sectors, in particular, are struggling to find workers,” RBC said.

Alongside labour constraints, turmoil in global supply chains is also an issue for certain sectors and regions. For example, “in Ontario, the global microchip shortage poses a significant challenge to the province’s auto industry,” the report said.

The report also noted the growing threat from climate change.

“The Prairies have always suffered from droughts. But this year’s conditions are exceptional, with dry conditions expected to cover more of Saskatchewan than even the brutal drought of 1961. Wildfires in Western Canada, and severe storms in eastern North America have also hit this year,” RBC said, noting that “the average cost of floods and storms rose by 60% in the last five years relative to a decade earlier.”

In a warming climate, drought may become more frequent, as well as more damaging, the report said.

“We can do little to create rains in the driest years, but addressing climate change and adapting to its impact should be high on to-do lists of businesses, communities and policymakers to avoid many more years of hampered production and tighter budgets,” the report concluded.