BENGALURU/OTTAWA (Reuters) - Canadian economic growth will accelerate in the second half of the year but probably not as much as the Bank of Canada expects, suggesting it may be too soon to rule out another interest rate cut, a Reuters poll found.
The survey of over 40 economists showed Canada’s economy will grow 2.0 percent this year and 2.2 percent the next, down from the 2.4 and 2.3 percent forecast in January.
That is much lower than predictions for the United States, which is expected to grow 2.8 percent. The most pessimistic growth forecasts for Canada, 1.5 percent and 1 percent for this year and next, are also lower than those for the United States. [ECILT/US]
All of the major bond dealers that responded to the survey expect first-quarter growth to be better than the no-growth forecast from the Bank of Canada, which used the phrase “atrocious” to describe the start of the year.
But even they say the bank is too optimistic about the rest of the year.
Economists predict annualized growth of 1.8 percent in the third quarter and 2.2 percent in the fourth quarter, compared with the central bank’s 2.8 percent and 2.5 percent forecast respectively. Still, their expectations for the year were nearly in line with the bank’s forecast for 1.9 percent this year.
Key to the bank’s outlook is the theory that the impact of the drop in oil prices is more front-loaded to the start of the year before dissipating. Oil is a major export for Canada.
“The assumption is that the oil shock just lasts for about a quarter, and after that it is smooth sailing ahead,” said Emanuella Enenajor, Canada and U.S. economist at Bank of America-Merrill Lynch.
“We have not really seen the full extent of the oil shock, and even the U.S. economic data has started to soften. The bank’s expectations are too high.”
The Bank of Canada shocked markets with an interest rate cut in January but has since left rates at 0.75 percent and Governor Stephen Poloz suggested last week no further cuts were imminent.
While rates are largely expected to remain on hold until the bank raises them in the third quarter of 2016, the possibility the economy could fall short of the bank’s forecast makes the path of monetary policy less clear. [CA/POLL]
The price of oil has stabilized after losing more than half of its value since June last year, supporting the case for the Canadian economy to rebound later in the year. A recent Reuters poll forecasts oil prices to rise next year. [O/POLL]
But the recent rally in the Canadian dollar, bolstered by oil prices and a more bullish central bank, could put pressure on the recovery, economists said.
“The Canadian recovery is, in the Bank of Canada’s mind, going to be driven by exports and a weaker currency is important in that view,” said Enenajor.
The loonie clocked its biggest weekly gain in nearly 3-1/2 years last week, rising close to 3 percent.
A stronger Canadian dollar will raise the probability of further policy easing, Enenajor said, which could also pose a risk to financial stability.
But a Reuters poll taken early April showed it will weaken over the next year. [CAD/POLL]
Inflation is expected to remain below the low end of the BoC’s 1 to 3 percent target range for much of the year, before rising to 1.4 percent in the fourth quarter.
While that could also add to the case for a rate cut, a record high household debt-to-income ratio is cause for worry.
The bank has expressed concern that a disorderly unwinding of these imbalances could hit parts of the economy and inflation.
Economists were split on how big a risk a correction in Canada’s robust housing market poses over the next two years, with 11 putting the risk at low and eight seeing the risk as high. None said very low or very high.
Polling and analysis by Anu Bararia; Editing by Ross Finley and W Simon