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 1.8 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 late, 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.
"As long as you're above 2 percent, you're still absorbing capacity, you're still describing a Canadian economy that remains fairly strong domestically but still struggled a little bit against some of those external headwinds," said David Tulk at TD Securities, which is predicting a 2.2 percent first-quarter growth rate.
Net exports, an inventory build and, to a lesser extent, consumption are expected to have contributed to growth, partly counteracted by a dropping off of government stimulus.
On a monthly basis, real gross domestic product rose by 0.1 percent in January from December before falling by 0.2 percent in February. The Reuters survey points to a much stronger March performance of 0.4 percent growth.
Editing by Jeffrey Hodgson