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Canada’s economy holds its breath as the Delta variant pursues trading partners

TORONTO, Aug 5 (Reuters) – With about 60% of its population vaccinated against COVID-19, Canada tops a ranking of the top countries fighting the pandemic, but that success is unlikely to get its commodity-linked economy entirely ahead of that global spread of the delta variant.

The bond market is already signaling that the pace of Canadian economic growth may slow as coronavirus cases increase in the United States, its largest trading partner, and several other major export markets.

While high vaccination rates reduce the likelihood of large-scale lockdowns in Canada, slower vaccination rates in some parts of the world could contribute to supply chain disruptions and weigh on exports, analysts said.

“For Canada as a small trading nation, we have to worry about what is 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 raw materials, including oil and copper, so its economy tends to be sensitive to global growth prospects. The United States, which accounts for about 75% of Canada’s exports, is facing a delta-induced surge in infections as the pace of its vaccination program slows. Continue reading

Fears that the highly contagious variant will hold back economic recovery have contributed to a slump in US and Canadian bond yields in recent weeks. The yield on ten-year inflation-linked US Treasuries, the so-called real yield, hit a record low of around minus 1.19% on Tuesday, while Canada’s equivalent was minus 0.62%.

Oil is down 10% after hitting a seven-year high of $ 77 a barrel in July, while copper fell from its record high in May.

“The Delta variant is likely to have more of an impact in emerging markets, where vaccination is not as high, and that could have an impact on supply chains,” said Jimmy Jean, Desjardins Group’s chief economist.

“If that means industrial production is suffering worldwide, we will certainly feel that effect in Canada through our exports,” added Jean.

Thursday’s data showed no slowdown in demand for Canadian goods, with exports rising 8.7% in June to a record $ 53.76 billion. The Bank of Canada expects the economy to grow by 6% this year. Continue reading

However, supply chain pressures are already being felt in Canada’s manufacturing sector, with activity growing at the slowest pace in July as it has been for five months. Continue reading

Additionally, companies in the travel and aviation industry may be nervous that rising U.S. infections could disrupt Canada’s plans to allow fully vaccinated American travelers into the country. Canada is slated to reopen its border to this group on Monday. Continue reading

“If things go a certain way in the US, you would think that we would close the borders again to prevent it from spreading to Canada,” said Jean.

A backlog in services could mean Canada’s economy is less dependent on trade than usual. Nevertheless, analysts pay close attention to the economic effects of the delta variant.

The outlook for the trade “depends heavily on what happens to the virus in the US,” Mendes said.

Reporting by Fergal Smith Editing by Denny Thomas and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

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