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Forward Guidance: Race Between Vaccine Rollout and Virus Spread Heating Up

It would not be at all surprising to see flash Canadian wholesale and manufacturing sale reports for February soften albeit after very solid January gains (wholesale sales rose 4.0%, manufacturing up 3.1% in January). The latter will likely continue to be weighed down by disruptions to auto production from ongoing computer chip shortages. But the economy still looks on pace to grow at a 4.5% (annualized) rate in Q1. Home building activity in February came in well above long run levels with 245K (annualized) house starts. And a 4% bounce-back in February retail sales retraced most of a 4.7% drop over December and January as restrictions on in-store shopping eased.

Growth south of the border also looks on track to pick up as virus containment measures ease. $242 billion in direct transfers to households out of the newly minted US $1.9 trillion stimulus package have already been paid out. A lot of that stimulus will go to support a recovery in services spending, which has a relatively low import content, as containment measures ease. So spillovers from that US growth into Canadian exports will be smaller than normal. Still, the dollar amounts are huge ($1.9 trillion is about 9% of annual US GDP) and some of that stimulus will also spill over into US trading partners.

The single greatest headwind to growth remains virus spread – and case counts are once again accelerating in parts of Canada, particularly Ontario. The race between the vaccination campaign and the spread of Covid-19 and its new variants will play a critical role in determining the speed at which the economy reopens. The good news on that front, is that Canadian vaccine deliveries are also accelerating with roughly 2 million doses of Pfizer and Moderna vaccines expected to arrive next week – roughly double the earlier weekly record.

Week ahead data watch:

US personal spending will likely moderate in February after a 2% jump in January. We look for faster increases in March as millions of Americans received another round of stimulus checks.