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By HaleStewart April 22, 2018 7:23 am
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Canada Appears Poised For Further Growth

          The Canadian economy was hit by the oil price declile in 2014 and experienced a mild recession.  But over the last two years, it was bounced back.  Now the Bank of Canada is faced with the possibility of higher growth and the accompanying inflation.  This week, the Bank of Canada maintained their current rate level.  They also released their latest economic analysis and projections for the Canadian economy:

Canada’s economic growth has moderated, and the economy is operating close to capacity. While a moderation was anticipated, temporary factors—notably, volatility in trade shipments, amplified by transport bottlenecks, and the dynamic response of housing markets to regulatory changes—are resulting in sizable short-term fluctuations in growth.

Looking through these fluctuations, economic growth is projected to average slightly above that of potential output over the next three years. Real GDP growth is now projected to be about 2 per cent in both 2018 and 2019 and to ease to 1.8 per cent in 2020, the estimated growth rate of potential. This profile reflects a slight downward revision in 2018 and a more notable upward revision in 2019 relative to the January projection (Table 2). The higher profile for economic activity incorporates additional fiscal stimulus and upward revisions to the estimated profiles of potential output (see Appendix, page 25) and national income.

To a large extent, the bank is overstating the degree of the economic slowdown and understating the extent of potential growth.  Let’s start with top-line GDP growth for the last eight quarters:

GDP at market prices (in blue) has been increasing since the 1Q16.  While it declined over the last two quarter, the latest two readings of 3% and 2.9% are still very strong, especially for a developed economy.  And, the 2Q17 number could be seen as an outlier.  The average of the last three quarters is 3.2% while the average for the last four quarters is 3%.  And the growth of final domestic demand recently rose 4% Y/Y after a series of continually higher readings – hardly a slowdown.    

There is little reason to believe that consumer spending will slow meaningfully.  Employment continues to grow ...


and the unemployment rate continues to drop:

Consumer spending was strong last year:

Durable goods purchases (in blue) increased on average at a 6.45% Y/Y rate.  The pace of semi-durable goods (in red) spending increased as the year went on; non-durable and service spending was consistent.  And while retail sales have slowed, they’re still in an obvious uptrend:

The bank is projecting an increase in business investment.  However, the data indicates the growth rate could be stronger than the bank thinks:

Commercial real estate (in blue) and equipment investment (in red) contracted during 2016.  But both are clearly accelerating.  And due to the dearth of activity in 2016, it’s reasonable to expect a continued faster pace in 2018-2019. 

            Canada’s export situation has been remarkably weak over the last two years:

However, the bank believes they will pick-up in the next 12-18 months:

Exports declined in the first quarter, in part reflecting transportation issues that interrupted the shipment of some commodities. These disruptions are anticipated to be temporary, and export growth is expected to rebound in the second quarter, led by a large increase in exports of crude oil as  production growth continues. Non-energy commodity exports, such as lumber and agricultural products, will begin growing again as the backlog of shipments caused by poor weather and capacity issues in rail transportation are addressed.

Finally, the bank acknowledged the possibility of an adverse outcome from the NAFTA situation:

Trade policy is an increasingly prominent risk to the global economic expansion. US tariff announcements and proposed retaliatory actions by China raise the risk of a more pronounced shift away from a multilateral, rules-based system. A wide range of outcomes are still possible for the  renegotiation of the North American Free Trade Agreement (NAFTA). Even without changes in trade arrangements, increased concerns about trade policies could lead to a sharper-than-expected tightening of financial conditions, lower confidence and a more pronounced slowing of growth. The Bank’s base-case scenario, while predicated on the assumption that existing agreements will remain in place, continues to incorporate adverse effects from uncertainty on global investment and NAFTA-related judgment  specific to Canada and Mexico. By convention, the direct impacts of tariffs announced by the United States and China will be added to the Bank’s forecast if, and when, they are implemented.

            As for prices, remember that 2% is not a ceiling, but instead a target.  Currently, inflation is 2.3%:


However, the weakness of the Canadian dollar relative to the USD probably means Canada has been importing a bit of inflation:

And the Bank projects inflation to remain slightly elevated for the near-term before returning to 2%:

CPI inflation is anticipated to remain modestly above 2 per cent until the end of 2018. Temporary factors, namely elevated gasoline prices and the impact of minimum wage increases, are expected to more than offset the fading effects of electricity price rebates and low food price inflation. In 2019, inflation is expected to return to about 2 per cent.

The above data indicates that Canada is in stronger shape their central bank thinks.  The employment situation is improving, which will contribute to further increases in consumer spending.  Business investment -- which was weak for several years -- will have to make up for lost time.  And exports are bound to bounce back.  It's likely the Back of Canada will have to raise rates in the near future.









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