The economy is growing at a strong pace in the last months of 2021, priming it to handle some of the damage inflicted by the raging Omicron variant of COVID-19 which would likely keep the Bank of Canada on course to raise interest rates early next year.

Gross domestic product in October fell in line with Statistics Canada estimates of 0.8 per cent growth, the agency reported on Dec. 23, as governments enforced the loosest virus restrictions yet. The data was accompanied by revisions to the September GDP, which ticked up 0.1 percentage point to 0.2 per cent. Despite the damaging, costly floods in British Columbia last month, Statistics Canada is placing preliminary estimates for November at 0.3 per cent thanks to growth in the hotel and restaurant sector, wholesale trade and arts, entertainment and recreation.

“The one-two combo of robust monthly gains shows that the economy had considerable momentum heading into the late-year Omicron storm. Even assuming a pullback in December activity on renewed restrictions and canceled plans, it still looks like the economy churned out a solid Q4,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note to clients.

Taking into account potential blows to growth delivered by Omicron, GDP is still poised for a 5.5 per cent increase, annualized, in the final quarter of 2021, said Stephen Brown, senior economist at Capital Economics. Porter revised BMO’s fourth-quarter estimates from four per cent to 4.5 per cent. That would push GDP above the central bank’s estimate of four per cent growth and bring it within less than a per cent of pre-pandemic levels, setting the stage for possibly five interest rate hikes next year as the economy grapples with extraordinary inflation not seen in three decades.

The consumer price index, a gauge for inflation, increased 4.7 per cent year over year in November, matching the gain in October, and continuing a hot streak of pressures that’s kept prices above the central bank’s target range of one to three per cent since April. In its latest rate decision on Dec. 8, the bank said it’s “closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation.” Governor Tiff Macklem has also said previously he would wait until the labour market made up for its COVID-related losses and achieved gains it would have seen had there not been a pandemic.

Statistics Canada reported on Dec. 23 that payroll employment grew by 131,700 positions, bringing the number of workers receiving pay or benefits from their employer within 0.6 percentage points of its pre-February 2020 level. Average weekly earnings stayed little changed from September to October, but year-over-year gains saw as much as four per cent growth in B.C., 3.4 per cent in Alberta and 2.7 per cent in Ontario. With inflation raging, some markets are suspecting Macklem and his deputies won’t be able to wait for a full labour recovery and might raise rates as early as January.

The manufacturing sector made a comeback in October, rebounding 1.8 per cent after a 1.5 per cent contraction in September. However, petroleum and coal products and paper manufacturing diminished some of the gains, which coincided with activity at gas stations dropping 3.6 per cent in the month.

Construction saw a boost after four declines in the past five months, rising 1.6 per cent. Real estate activity followed in tandem, expanding 0.8 per cent, the largest increase since December 2020.

The accommodation and food sector continued to struggle in October, with output dropping 0.5 per cent. The arts, entertainment and recreation sector, on the flip side, surged 7.1 per cent as consumers grew more comfortable with attending public events. That growth could disappear, though, as rising COVID-19 cases prompt some provinces to bring back stricter restrictions.

“But given the stronger starting point in the fourth quarter, the negative effect of those restrictions — which will ultimately be temporary — may not delay the bank’s tightening plans,” Brown wrote in a note.

Economists suspect Omicron would deliver immediate downsides to growth in the first months of 2022, but the economy has built up enough momentum to weather viral surges and capacity limits. There will be periods of disruption, as COVID moves from the pandemic to the endemic stage, but Royal Bank of Canada deputy chief economist Dawn Desjardins said the growth will continue next year.

“When we’re thinking about 2022, or thinking about what will drive the economy, it is going to be strong labour market growth, potential for wage increases, savings — all of those things,” Desjardins said, adding that record demand from employers to fill new positions will juice growth. Job vacancies amounted to more than 964,300 empty roles, Statistics Canada reported, with September having experienced the highest number of vacancies since data collection began, with more than a million vacant jobs.

The roaring demand for workers also presents an upside for accelerating digitization, Desjardins said, forcing some businesses to look at automation as they deal with tightness in the labour market. That would up the demand for higher-skilled jobs, ultimately benefitting the economy.

Consumers also built-up record savings and are primed to spend in the new year. This could allow them to weather interest-rate hikes, too, as a new era of higher interest rates are set to begin, said Philip Petursson, chief investment strategist at IG Wealth Management.

“We’re in a good position. The economy is quite healthy today,” he said.

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