Omicron hit likely short-lived but supply chains may suffer, says Bank of Canada governor

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Bank of Canada Governor Tiff Macklem said he assumes any economic hit from the Omicron variant will be short lived, although he acknowledged that additional supply disruptions could further stoke inflation.

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“Although each wave has knocked us back, we’ve come out ahead as we’ve gone into the next wave,” Macklem said in a year-end interview with Financial Post editor-in-chief Kevin Carmichael. “We’ll have to follow this closely, but that would be the base case.”

COVID-19 cases spiked this week, prompting governments to tighten health restrictions after a summer and fall of relative normalcy. Ontario announced the province would accelerate the timeline for people over the age of 18 to get vaccine booster shots, moving the start date to Dec. 20 from January. Quebec is urging any workplaces that can facilitate work-from-home operations to do so. Prince Edward Island is reinforcing isolation for travellers into the province until they receive a negative test result. Each of those provinces are reinstating capacity limits.

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The latest wave of infections will cause individual disappointment, but the broader economy should be able to withstand whatever comes. Vaccination rates are high and policy-makers have learned valuable lessons. Businesses and their customers have embraced the digital economy, ensuring commerce will continue, albeit less smoothly.

Although each wave has knocked us back, we’ve come out ahead as we’ve gone into the next wave

Bank of Canada Governor Tiff Macklem

However, one important difference between the Omicron outbreak and previous waves is elevated levels of inflation. Statistics Canada reported earlier this week that the consumer price index (CPI) increased 4.7 per cent in November, matching the biggest increase since the early 1990s.

Slower economic growth could offset some of those price pressures. Gasoline is the main driver of Canadian inflation and oil prices have dropped in anticipation of less demand in the months ahead. At the same time, tighter health restrictions could result in additional supply disruptions, exacerbating shortages.

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“Part of the reason why global goods prices have gone up so much is global demand for goods has been strong,” Macklem said in the interview, which followed his final speech of 2021 on Dec. 15. “As economies reopened, we started to see some rebalancing towards services. When you can go to the gym, you don’t need to buy your home gym equipment. Omicron could delay that.”

Still, Omicron could prove to be a smaller blip on the radar compared to past surges of the virus, which led to lockdowns. Ontario Premier Doug Ford at a press conference on Dec. 15 said the provincial government wasn’t yet considering a broad lockdown, but rather targeting specific locations, such as schools.

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Royal Bank of Canada deputy chief economist Dawn Desjardins said the economy has built enough momentum to handle a disruption like the recent variant. “While we will have fits and starts in some industries, because of the virus — it doesn’t seem to be disappearing — so acknowledging that, yes, there will be periods of disruption. But, in general, we do think that the economy will continue to grow in 2022,” she said in an interview.

Desjardins and her colleagues in Royal Bank’s economics department forecast growth of about 4.25 per cent next year, which she describes as “very strong.” There is lots of momentum from the labour market. Employment returned to pre-pandemic levels this fall, and last month the unemployment rate plunged to six per cent, a level some economists associate with full employment. Wages also are rising, adding to Canadians’ bank accounts.

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Consumers also built up record savings and are primed to spend in the new year. This could allow them to weather interest-rate hikes, too, said Philip Petursson, chief investment strategist at IG Wealth Management. “We’re in a good position. The economy is quite healthy today,” he said.

Macklem and the central bank will be paying attention to the proliferation of the new variant at a time when everything seemed to be getting back on track. “We’re right at the beginning of Omicron,” Macklem said. “I think it’s hard to say what the overall balance of demand and supply effects will be, but I’m telling you how we are going to look at it and how we’re going to analyze it.”

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