By Fergal Smith
TORONTO (Reuters) - Canadian restrictions to tackle COVID-19 will likely come at a cost of slower economic growth at the start of the year than in the United States, but that has not stopped investors from raising bets the Bank of Canada will hike interest rates next week.
With hospital capacity stretched, Canadian provincial governments have rolled out restrictions that are tighter than in the United States and many other countries to slow the spread of the Omicron variant of the coronavirus.
As a result, economists at some of the large Canadian banks expect little or no GDP growth in Canada in the first quarter compared to estimates of about 4% to 5% before the emergence of the variant.
"I see much more risk to the Canadian numbers than the U.S. numbers, simply because we are seeing much more important restrictions in Canada," said Doug Porter, chief economist at BMO Capital Markets.
But economists also say that activity is likely to rebound quickly when restrictions are lifted.
Investors seem to be counting on it. Money market data on Monday showed the chances of the Bank of Canada announcing a rate hike on Jan. 26 have increased to nearly 70% after a central bank survey of businesses pointed to higher wage pressures.
That would be an earlier move than the Canadian central bank has been signaling and a quicker lift-off than in the United States where the Federal Reserve is not expected to raise rates until March.
The BoC will provide for the first time next week its estimate of economic growth in the current quarter.
"We think the Bank of Canada will be revising down their Q1 forecast in January as we've just done, but in terms of the impact (of shutdowns) on inflation that's not as clear," said Josh Nye, senior economist at Royal Bank of Canada.
"You maybe have a bit of disinflationary pressure in some of the services sectors that are going to be hit hardest by this, but when you have people not able to go into work, that impacts the supply side of things."
The Canadian healthcare system is expected to be further strained by a surge in cases of the new variant in the coming weeks.
When it comes to capacity at hospitals and clinics, only Italy was ranked lower than Canada among G7 countries in the 2021 Global Health Security Index.
Ontario, Canada's most populous province, temporarily moved schools to remote learning and closed indoor dining among other measures, while neighboring Quebec banned private gatherings and imposed a night curfew in the province to fight Omicron.
Still, Canada's economy has the potential to outpace that of the United States for the full year since Canadian activity was held back more by previous waves of the pandemic as well as drought and chip shortages that slowed auto production in 2021.
Canada's economy is expected to have only just climbed back to its pre-pandemic peak in the fourth quarter of last year, two quarters later than in the United States.
"There is a lot of room for Canada to play catch-up," Porter said, forecasting 2022 growth of 4%.
"We do suspect that after we get through the messiness of the first quarter in Canada, we will outpace the U.S. through the rest of the year."
(Reporting by Fergal Smith; Editing by Paul Simao)