By Julie Gordon and David Ljunggren
OTTAWA (Reuters) - Canada's economy could contract in the first quarter of 2021 as rising COVID-19 infections dampen near-term growth, Bank of Canada Governor Tiff Macklem said on Tuesday.
Macklem, speaking with reporters after a speech, said that while the arrival of effective vaccines had created more clarity around when the pandemic will end, the worsening second wave was putting a "chop" in the recovery.
"Near-term, the situation is clearly looking more difficult, Infections are spreading," he said. "We do expect that that's going to weigh on growth in the first quarter ... the first quarter could even go negative."
He later said recent momentum will likely mean economic growth in the fourth quarter above the 1% forecast by the central bank in its October Monetary Policy Report (MPR).
Macklem declined to say whether a faster vaccine rollout would lead to the economic slack being absorbed sooner than into 2023, as projected in that same MPR, reiterating that all factors would be considered ahead of a January update.
The Bank of Canada has said rates will stay at their effective lower bound of 0.25% until the economic slack has been absorbed and inflation has returned to its 2% target.
Earlier in his speech to a business audience, Macklem said household spending had so far led the recovery. But to be sustainable, Canada would need to boost exports, productivity and business investment.
While exports and business investment could bounce back more quickly than after the 2008 global financial crisis, Macklem warned that services exports would struggle until a vaccine is widely available.
"I would underline though that the arrival of new effective vaccines is a tremendously positive development," he said. "It really enforces that we are going to get out of this."
Macklem expressed concern about the strengthening Canadian dollar, however, saying it was hurting Canada's exports in the crucial U.S. market.
"For the most part, that appreciation doesn't reflect made-in-Canada factors," he later told reporters. "It largely reflects a broad-based depreciation of the U.S. dollar."
The Canadian dollar held near its strongest level in more than 2-1/2 years at 1.2688, or 78.81 U.S. cents, after the speech.