Grand opening, cutting red ribbon

Citing the impact of supply chain disruptions, economists at the Bank of Nova Scotia have slashed their economic forecast for Canada.

In a research note, the bank’s economists cut their GDP forecast for 2021 to 4.8% from a previous call of 6.1%, and lowered the 2022 forecast to 3.6% from 4.1%.

“Challenges along the supply chain account for the majority of these revisions as demand remains extremely well-supported by fundamentals,” the note said, adding that the long-run effects of these supply-chain issues are weighing on potential output.

“A big revision to the Canadian outlook is in order owing to supply-chain constraints that appear longer lasting and more binding than previously assessed,” it said. Constraints are mainly due to challenges in obtaining key inputs “either because of component shortages, such as semiconductor chips or transportation bottlenecks.”

The report noted that, while the Delta variant is to blame for some of the supply-chain issues, it isn’t having much impact on consumer demand.

“The supply constraints bite precisely because demand is so strong,” the bank said.

The resulting supply-demand imbalance is also fuelling inflation, it said, as firms pass along the effects of rising input prices.

Additionally, while the federal election remains up for grabs, Scotia said it doesn’t expect the result to affect economic activity in 2022.

Scotia said its initial forecast for 2023 sees growth in the 3% range.

In terms of monetary policy, “We continue to expect that the Bank of Canada will raise its policy rate next summer and that the Federal Reserve will raise rates in early 2023,” it said.