Bank of Canada drops growth outlook

OTTAWA — The Bank of Canada has downgraded the country’s growth outlook yet again with fresh projections Wednesday that see an impending drop in housing activity tied to new government rules and, more importantly, signs of a permanent decline in exports.

The gloomier economic picture weighed heavily enough on the central bank’s governing council for them to actively discuss lowering the trendsetting interest rate from its already-low perch of 0.5 per cent, governor Stephen Poloz said. But the bank ultimately kept the rate where it’s been since July 2015, as analysts had widely expected.

The bank’s latest monetary policy report was released as the economy continues to struggle to emerge from a prolonged period of slow growth and recover from the negative effects of the plunge in oil prices that began two years ago.

The downward revision for exports trimmed the bank’s forecast three months ago for real gross domestic product by 0.6 per cent between now and the end of 2018.

Overall, the bank is now projecting real GDP to expand by just 1.1 per cent this year, down from its July projection of 1.3 per cent. For next year, the bank is forecasting growth of two per cent, down from its previous call of 2.2 per cent.

The report also predicted growth to take a hit from a decline in real estate sales activity that’s expected to follow recent federal measures intended to stabilize the housing market and curb the vulnerability associated with the accumulation of household debt.

The bank predicted the impact of those changes could lower real GDP by 0.3 per cent by the end of 2018, though Poloz insisted that number remains “highly uncertain.”

He said there are many moving parts, such as how potential homebuyers will react to Ottawa’s new rules. The measures include a stress test for all insured mortgage applications to ensure wouldbe borrowers would still be able to make payments if interest rates rose or their personal financial situations changed.

Asked about the potential cost of the measures to the economy, Poloz compared it to buying insurance against the possibility of another economic shock or recession.

“By paying a bit of a price there you help avoid, at least, something that could be much worse for the economy and therefore it’s a good deal,” he said.

The bank added that the economy isn’t expected to return to full capacity until mid-2018, which it called “materially later” than the late-2017 time frame it had anticipated three months ago.

Despite the downgrades, the bank also offered reassurances that it sees promise ahead.

Thanks to momentum in the global and U.S. economies, the bank still predicts the Canadian economy to rebound over the final half of this year from a second-quarter contraction.

The hoped-for bounce back, however, is expected to come at a slower pace, with an average real GDP growth of about 2.5 per cent over the last two quarters of 2016.

The bank predicts thirdquarter growth of 3.2 per cent, a decline from the July forecast of 3.5 per cent, and fourth-quarter growth of just 1.5 per cent, down from 2.8 per cent.

The government’s enhanced child-benefit program, which started mailing cheques to families in the summer, is also expected to deliver a boost in the second half of 2016. Ottawa’s commitment to invest billions in infrastructure will also begin having an impact moving forward, the bank said.