Canada is G7’s surprise growth leader, for now

Nation has one of globe’s fastest-growing economies, but Bank of Canada expects a drop to slower pace

Almost out of nowhere, Canada has become one of the fastestgrowing economies in the developed world.

The country, which struggled mightily with falling crude prices the past two years, grew at an annualized pace of almost four per cent in the first quarter, according to the Bank of Canada’s latest estimates. No other Group of Seven economy even came close.

For all 2017, the central bank is projecting 2.6 per cent growth — which would put the economy at the top of the rich-country growth scale.

Yet even with the economy suddenly running hot, caution prevails. The Canadian dollar has had a middling performance despite the strong economic numbers.

At a rate decision last week in Ottawa, Canada’s central bank revised up growth projections for 2017, but cut them for 2018. It also raised questions about the sustainability of the rebound and the country’s long-term growth outlook.

The Bank of Canada “welcomes the recent strength in economic data and wants to see more of it in order to be more confident that growth is on a solid footing,” Senior Deputy Governor Carolyn Wilkins told reporters last week. Policy-makers provided three reasons for why they believe growth will revert to a slower pace:

The energy sector is stabilizing, which removes a major drag on GDP. But that doesn’t mean it will be a source of growth anytime soon.

An increase in government transfers is boosting household spending, but here too the impacts on growth will level off.

Housing activity in the greater Toronto region, which has been on a tear, will slow.

And they added another worry. Whatever growth there is just doesn’t feel right given the weakness of exports and investment.

“We do not yet see the well-balanced base,” Wilkins said.

Bank of Canada Governor Stephen Poloz has often outlined what he thinks the economy will look like when things return to normal — a self-generating expansion not fuelled by policy. Trade and business investment are crucial to that story.

But those two components have rarely been weaker. The central bank, for example, sees business investment declining for a third straight year in 2017 — only the second time in records dating back to the 1950s that’s ever happened and the first time outside of a recession.