July 23, 2015 / 2:02 PM / 2 years ago

Canada's economy to bounce out of slump; no more rate cuts due: Reuters poll

A man is reflected in a window while walking past the Bank of Canada office in Ottawa, Canada July 16, 2015.Chris Wattie

BENGALURU/OTTAWA (Reuters) - The Canadian economy is already bouncing back from a slump in the first half of the year, but it remains vulnerable to further falls in oil prices and any renewed weakness in export demand from the United States, a Reuters poll found.

After the economy contracted in the first three months of the year, the second quarter also got off to a weak start, suggesting Canada, a major oil exporter, may have been in recession in the first half of 2015.

But economists, none of whom predicted such an outcome when polled on the outlook six months ago, forecast gross domestic product is already re-accelerating to a 1.7 percent rate, followed by 2.2 percent in the fourth quarter.

A Reuters poll taken last week after the Bank of Canada shocked markets for a second time this year with an interest rate cut to dull the sting from falling oil prices, this time to 0.50 percent, found that likely will be the floor. [CA/POLL]

Rates are expected to rise late next year, bringing policy in Canada back in line with the U.S., its biggest trading partner. The Federal Reserve is expected to lift rates for the first time in nearly a decade in September. [ECILT/US]

"Until we see a meaningful sign that U.S. growth is really benefiting Canada, the economy is going to be under meaningful pressure," said Benjamin Reitzes, senior economist at BMO Capital Markets.

That may be a tall order, given that there is no major acceleration in U.S. growth forecast on the horizon and any potential perceived benefit from a weaker Canadian dollar may already have taken place.

While a rate hike from the Fed might weaken the loonie further, that will only provide moderate support for the Canadian economy, said Emanuella Enenajor, senior economist at BofA-ML.

"It is hard to say that the Fed rate hike is actually going to be positive for the Canadian economy and would motivate the (Bank of Canada) to move in lock-step."

BoC Governor Stephen Poloz is optimistic the economy will regain momentum in the current quarter, helped by stronger U.S. demand for non-energy exports, a view which economists polled mostly shared.

The latest Reuters survey predicted that the Canadian economy will grow 1.3 percent this year and 2.1 percent the next, a significant downgrade from the 2.0 percent and 2.2 percent forecast in the last poll in April.

But that is still an optimistic full-year view given most now expect a mild recession took place in the first half. Inflation is expected to stabilize around the BoC's 2 percent target by the end of next year.

Some economists said the bank's latest rate cuts could pose a risk to Canada's financial stability by encouraging already over-indebted households to pile on more loans and further inflate an already extremely expensive housing market.

Canada's economy sailed with only mild damage through the worst of the global financial crisis in 2008 that brought a booming U.S. housing market to its knees.

But while the U.S. housing market is recovering from an historic crash that took prices down by a third or more, the unrelenting rise in Canadian house prices has sparked fear among some economists of a sharp correction.

The average Canadian home price has more than doubled over the past decade. But this is complicated by the varying speeds of regional housing markets across the country, including the red hot cities of Toronto and Vancouver and the slowing oil-exporting province of Alberta.

Polling and analysis by Anu Bararia; Editing by Ross Finley and Chizu Nomiyama

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