Canada first quarter GDP seen short of central bank forecast

Mon May 28, 2012 10:42am EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Randall Palmer

OTTAWA (Reuters) - The Canadian economy probably expanded at a significantly slower rate in the first quarter than the Bank of Canada had predicted in January, and in fact its spare capacity may have risen, a Reuters survey of analysts showed on Friday.

The median forecast of an annualized growth rate of 1.9 percent compared with the central bank's 2.5 percent forecast and matched the lukewarm fourth-quarter rate.

The Bank of Canada has estimated that the growth in economic capacity rises by 2 percent a year, so any economic growth below that rate means a wider output gap.

And a wider output gap - the difference between potential and actual output - would make the Bank of Canada (BoC) less likely to raise interest rates because it reduces the chances of a pickup in inflation.

"If it was just a case of growth coming up a bit light, I think the BoC could finesse its way around that and still make a case for hikes in the second half," said Doug Porter, deputy chief economist at BMO Capital Markets, which predicts 1.8 percent growth in the quarter.

"But at the same time we're seeing a major flare-up in concerns about Europe and some cooling of the U.S. economy."

The central bank said on April 17 that it might have to start raising interest rates and referred again to that language as recently as May 8. But overnight index swaps, which track the central bank's main policy rate, are now beginning to point to the possibility of a rate cut instead.

Still, more than a third of the analysts surveyed by Reuters see first-quarter growth at 2 percent or more.   Continued...