Growth surge forces rethinks

FORECASTERS

OTTAWA • A surprisingly powerful performance from the Canadian economy is pushing some forecasters to change their outlooks — starting with their predictions for Wednesday’s central bank rate announcement.

It’s also led others to start questioning whether the Trudeau government’s multibillion-dollar plan to boost infrastructure spending for the coming years risks overheating the already-sizzling economy.

Last week, the latest growth numbers showed the economy expanded at an annual pace of 4.5 per cent in the second quarter of 2017. The bigger-than-expected surge, driven by consumer spending, followed an impressive jolt of 3.7 per cent growth over the first three months of the year.

The growth, measured by real gross domestic product, caught markets by surprise and has many experts revising expectations on when the Bank of Canada will hike its trendsetting rate.

More of them now expect the next increase to land Wednesday, instead of later this fall as most had anticipated just days ago.

“Everybody was wrong by a wide margin — that really doesn’t happen very often,” Randall Bartlett, chief economist for a University of Ottawa think tank, said in reference to the second-quarter GDP number beating the consensus call of 3.7 per cent.

“That kind of spooked everybody in the market.”

Scotiabank’s Derek Holt is among those who moved up their rate call after the GDP release. While he acknowledges a rate hike Wednesday is no “slam dunk,” he expects Governor Stephen Poloz to move because growth has far exceeded the Bank of Canada’s projections.

Poloz raised the rate in July to 0.75 per cent from 0.5 per cent to undo one of the two 25-basis-point cuts he introduced in 2015 following the collapse in oil prices. He’s widely expected to increase it by another 25 basis points.

But despite the big GDP numbers to start 2017, many analysts — including Bartlett — still expect Poloz to wait until October.

The stronger-than-expected economy has also encouraged some experts to call on the federal government to revisit the timing of its massive infrastructurespending plan.

National Bank senior economist Krishen Rangasamy said Ottawa should consider delaying some infrastructure investments. Otherwise, the extra stimulus could force the Bank of Canada to raise rates more aggressively, he warned.

“These days, there are fewer folks arguing for infrastructure stimulus,” wrote Rangasamy, who admitted he was among those calling for such a move as recently as last year.

“Not only is the Canadian economy booming ... but more importantly, private business investment is now bouncing back.”