July 21, 2016 / 3:42 PM / 4 years ago

Cheap oil, soft U.S. demand to drag on Canadian economic growth: Reuters Poll

(Reuters) - Canadian economic growth will pick up a bit next year, helped by federal fiscal stimulus, but subdued U.S. demand and weak oil prices are expected to limit gains, a Reuters poll found.

A worker pours concrete at a construction site in Ottawa, Canada, April 8, 2016. REUTERS/Chris Wattie

Canada is running a budget deficit of C$29.4 billion ($22.53 billion) this fiscal year to help fund increased infrastructure and social welfare spending, making it one of few major economies using fiscal policy to try to spur growth.

Still, the survey of nearly 40 analysts forecast the economy will expand just 2.1 percent next year, in line with the International Monetary Fund’s estimate but lower than the Bank of Canada’s 2.2 percent projection.

That pace of growth is relatively modest, matched at several points over the past few years, and is expected to keep the central bank on the sidelines until at least the end of the next year. [CA/POLL]

“Fiscal policy stimulus has been announced but has not yet begun to affect the economy. The challenge is for the government to implement the infrastructure plan on schedule,” David Watt, chief Canada economist at HSBC Bank Canada, wrote in a note.

“The economy is not in recession, it does remain on a slow growth trajectory, and there is little room for delay.”

The economy will expand 1.3 percent in 2016, the poll forecast, similar to the central bank’s estimate, but lower than the 1.7 percent median consensus in a poll three months ago.

Canada, a major oil exporter, is still grappling with the impact of battered crude prices and recent wildfires in northern Alberta that forced production shutdowns and likely caused the economy to shrink in the second quarter.

Bank of Canada Governor Stephen Poloz has long pinned his hopes on a non-energy export-led revival in growth, driven by stronger U.S. demand and helped by a weaker Canadian dollar.

But almost half of the analysts who answered an extra question in the poll said that view was too optimistic.

Canada’s biggest trading partner, the United States, may be on more solid ground, but its economy is expected to grow just 1.9 percent this year and 2.2 percent in 2017.

Uncertainty around the timing of the U.S. Federal Reserve’s next rate move and the upcoming U.S. presidential election could weigh on demand for Canadian exports despite a weak domestic currency. That uncertainty and the soft outlook for oil prices are seen keeping growth subdued.

“A cheap Canadian dollar can help (with) market share (but) it cannot create the underlying demand. Growth has to come from steady growth in the U.S. and an improvement in the global economy,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

Canada’s central bank cut rates twice last year to support the economy against the hit from the oil price plunge. That led to a surge in borrowing, which has helped extend a housing market boom.

The household debt-to-income ratio was 165.3 percent in the first quarter, just below its record high.

While the Bank of Canada is expected to raise rates in the final three months of 2017, a majority of respondents in the latest survey were concerned that low-for-long interest rates could further fuel household indebtedness.

A small minority of economists, however, still expect a rate cut as the central bank’s next move, as overall inflation remains below its 2 percent target. [CA/POLL]

“The problem is that by raising interest rates steeply to curb house prices, the economy may slow sharply, pushing household debt even higher as a percentage of incomes,” said Thomas Costerg, senior economist at Standard Chartered Bank.

(For other stories from the Reuters global economic polls:)

Polling and analysis by Anu Bararia; Editing by Ross Finley and Jeffrey Hodgson

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