Beginning of the end for over-the-top growth
Weaker GDP expected in the second half ECONOMY
• Blink and you may miss it, but the beginning of the end of over- thetop economic growth is just around the corner. That might sound alarmist, but most economists and policymakers are setting the stage for a weaker performance in the second half of 2017 and beyond.
The economy reached a super- sized output spike of four per cent between April and June, according to private forecasts ahead of Thursday’s official secondquarter tally.
That wa s preceded by 3.7- per- c e nt growth in the first quarter. But don’t rely on that run extending through the remain der of this year, let alone into the next. Higher interest rates from the Bank of Canada in July, taking its key lending level up a quarter point to 0.75 per cent, and the possibility of another hike later this year could crimp some borrowing and investment activity.
But that will be more by design than economic happenstance. “In starting to raise rates, the Bank of Canada is judging that it needs to slow growth to two per cent or so to avoid an inflation overshoot down the road,” said Avery Shenfeld, chief economist at CIBC World Markets.
“Higher rates will help cool retailing and home building from the recent pace, and even with a target for more moderate growth, we will see some offsetting improvement from business and government capital spending. ( But) there is a risk of piling on.
“Canada is also l ooking at a further tightening i n mortgage regulations to slow housing, and we don’t want to risk turning a cooling into a deep freeze,” Shenfeld said.
“For t hat r eason, af - te ra hike in the next few months, the Bank of Canada is likely to pause for a half- year or so to see how things are evolving.” A similar economic pattern has been unfolding in the United States, where the Federal Reserve raised its rate in June and plans to lift its key lending level again some time this year — although it has recently been pushing back its tightening schedule.
“With inflation ta me, there’s no reason for either the BoC or the Fed to err on the side of too many hikes ,” Shenfeld said. Despite tighter lending regulations, household spending remains King in Canada.
But there are now more contenders for that title — exporters and business i nvestors, among t hem. Down the road, “residential investment is anticipated to contribute less to overall growth,” the central bank said in announcing its July rate hike.
“Macro- prudential and housing policy measures, as well as higher longer- term borrowing costs resulting from the projected gradual rise in global long- term yields, are all expected to weigh on housing expenditures.”
Meanwhile, spending by companies, long criticized for not putting enough of their post- recession cash to work, will likely heat up along with exports, “triggered by expanding economic activity in both the non- resource and resource sectors,” according to the bank.
“The expansion in the resource sector indicates that the adjustment in the level of investment in this sector in 2015 and 2016 to the past oil price shock is largely complete.”
Craig Alexander, senior vice- president and chief economist at the Conference Board of Canada, said monetary policy, fiscal policy and the Canadian dollar “have all contributed to the very strong pace of economic growth we’re having this year.
“And as we move into next year, the appreciation of the Canadian dollar that we’ve been seeing, a smaller increase in fiscal stimulus and a modest rise in interest rates — all of those factors — will contribute to a moderation in Canadian economic growth to something that is still very healthy and close to its long-term trend,” Alexander said.
“From the point of view of the Bank of Canada, the ideal outcome is an economy that is growing at close to its long- term trend rate, which now is two per cent or slightly below, inflation at two per cent and slack in the economy — the output gap having closed — to achieve that outcome every single year,” he said.
“There are going to be years where there’s slack in the economy, and there’s going to be years where there’s no slack and the central bank needs to be acting to cool things down.”
And that’s what the central bank is now doing.