TORONTO (Reuters) – With some 60% of its population vaccinated against COVID-19, Canada tops the list of top countries battling the pandemic, but this success is unlikely to fully protect its commodity-linked economy from the worldwide spread of the Delta variant.
The bond market is already signaling that the pace of Canada’s economic growth could slow as coronavirus cases increase in the United States, its largest trading partner, and some other major export markets.
While the high vaccination rate reduces the chances of large-scale lockdowns in Canada, a slower vaccination rate in some parts of the world could exacerbate supply chain disruptions and weigh on exports, analysts say.
“For Canada, as a small trading nation, we have to be concerned about what’s going on in other parts of the world,” said Royce Mendes, senior economist at CIBC Capital Markets. “Not only for ethical and human reasons but also for economic reasons. “
Canada is a major exporter of auto parts and commodities, especially petroleum and copper, so its economy tends to be sensitive to prospects for global growth. The United States, which accounts for about 75% of Canadian exports, faces an increase in infections caused by Delta as the pace of its vaccination program slows.
Fears that the highly contagious variant would dampen the economic recovery have contributed to falling US and Canadian bond yields in recent weeks. The yield on inflation-protected 10-year U.S. Treasuries, the so-called real return, hit a record low on Tuesday at around minus 1.19%, while Canada’s equivalent rate was minus 0.62 %.
The price of oil fell 10% after hitting a seven-year high of nearly $ 77 a barrel in July, while the price of copper fell from May’s record high.
“Where the Delta variant will have the most impact is probably in emerging markets where vaccination is not as high, and that could affect supply chains,” said Jimmy Jean, chief economist at Desjardins Group.
“If that means industrial production globally is taking a hit, we’re definitely going to feel that effect in Canada through our exports,” added Jean.
Thursday’s data showed no slowing demand for Canadian products, with exports rising 8.7% to a record C $ 53.76 billion in June. The Bank of Canada forecasts economic growth of 6% this year.
But supply chain pressures are already being felt in Canada’s manufacturing sector, with activity increasing in July at the slowest pace in five months.
Additionally, companies in the travel and airline industries may fear that rising infections in the United States could disrupt Canada’s plans to allow fully vaccinated American travelers to enter the country. Canada is expected to reopen its border to this group on Monday.
“If things take a certain course in the United States, you might think we would close the borders again to prevent this from spreading to Canada,” Jean said.
The pent-up demand for services could mean that the Canadian economy is less dependent than usual on trade. Still, analysts are paying close attention to the economic impact of the Delta variant.
The business outlook “is highly dependent on what’s going on with the virus in the United States,” Mendes said.
(Reporting by Fergal Smith; Editing by Denny Thomas and Paul Simao)