Bank of Canada holds the line

GDP re­bound is en­cour­ag­ing, too early to call an im­prove­ment


OT­TAWA— The Bank of Canada held its trend­set­ting in­ter­est rate un­changed on Wed­nes­day, de­spite a re­cent run of stronger-than-ex­pected data, say­ing it be­lieves the econ­omy has yet to show it can stick to the higher growth tra­jec­tory.

In hold­ing the rate at 0.5 per cent, the cen­tral bank said it also con­sid­ered sig­nif­i­cant un­cer­tain­ties still weigh­ing on its out­look, in­clud­ing the po­ten­tially ad­verse im­pacts of the U.S. eco­nomic agenda.

Cana­dian growth ex­ceeded the bank’s ex­pec­ta­tions and it now pre­dicts real gross do­mes­tic prod­uct will ex­pand at an an­nual rate of 2.6 per cent in 2017 — up from its Jan­uary fore­cast of 2.1 per cent.

The re­cent im­prove­ment, it said, was largely fu­elled by un­ex­pect­edly ro­bust res­i­den­tial in­vest­ment as well as tem­po­rary fac­tors such as the re­sump­tion of ex­pen­di­tures in the en­ergy sec­tor and the con­sumer-spend­ing lift from big­ger child-ben­e­fit cheques.

How­ever, the bank noted ex­port growth was un­even and that there were signs of weak­ness in ar­eas such as busi­ness in­vest­ment and within un­der­ly­ing em­ploy- ment in­di­ca­tors such as hours worked and wages.

“While the re­cent re­bound in GDP is en­cour­ag­ing, it is too early to con­clude that the econ­omy is on a sus­tain­able growth path,” the bank said in a news re­lease that ex­plained its de­ci­sion.

TD Bank se­nior econ­o­mist Brian DePratto said the bank is at­tempt­ing to “throw cold wa­ter” on dis­cus­sion that the econ­omy has been im­prov­ing.

“The growth out­look may be sun­nier, but it seems to be all about the neg­a­tives for gov­er­nor (Stephen) Poloz,” DePratto said in a re­search note.

“Poloz re­mains fo­cused on the soft spots in Cana­dian labour mar­kets and ex­ports, and is not yet ready to de­clare Canada ‘out of the woods’ when it comes to un­even­ness in eco­nomic growth.”

Be­yond 2017, the bank pre­dicted growth will mod­er­ate and be­come more bal­anced.

It an­tic­i­pates greater con­tri­bu­tions from ex­ports and busi­ness in­vest­ment. The bank also ex­pects the pow­er­ful pace of house­hold spend­ing — par­tic­u­larly in res­i­den­tial in­vest­ment — to even­tu­ally slow next year as debt lev­els and bor­row­ing costs rise.

For this year, how­ever, the bank be­lieves hot hous­ing mar­kets in cities such as Toronto will help res­i­den­tial in­vest­ment de­liver a “sig­nif­i­cantly higher” con­tri­bu­tion to Canada’s growth per­for­mance than it had an­tic­i­pated in Jan­uary.

The bank also warned that climb­ing real es­tate prices in the Toronto area ap­pear to now be driven, in part, by spec­u­la­tion.

Eco­nomic growth, it said, is now ex­pected to ex­pand by 1.9 per cent in 2018, down from the bank’s Jan­uary fore­cast of 2.1 per cent, and to hit 1.8 per cent in 2019. The fu­ture, how­ever, looks murky. The state­ment said the bank’s gov­ern­ing coun­cil was “mind­ful of the sig­nif­i­cant un­cer­tain­ties” faced by the Cana­dian econ­omy.

In its quar­terly mon­e­tary pol­icy re­port, which was also re­leased Wed­nes­day, the bank said its out­look once again fac­tored in some of the ef­fects caused by on­go­ing un­knowns around the po­ten­tial in­tro­duc­tion of U.S. changes, es­pe­cially in re­la­tion to trade and fis­cal poli­cies.

With the tim­ing of any U.S. pol­icy changes still un­clear, the bank said its base-case pro­jec­tion in­cludes only the es­ti­mated im­pact of “pro­longed and el­e­vated trade pol­icy un­cer­tainty” on trade and in­vest­ment in Canada and in­ter­na­tion­ally.

Changes un­der dis­cus­sion in the U.S. in­clude the rene­go­ti­a­tion of the North Amer­i­can Free Trade Agree­ment, cor­po­rate and per­sonal tax cuts, reg­u­la­tory eas­ing and a po­ten­tial bor­der tar­iff.

The bank said Cana­dian firms “re­main wary” over po­ten­tial U.S.-re­lated de­vel­op­ments that could in­crease pro­tec­tion­ism and re­duce com­pet­i­tive­ness in the event of cor­po­rate tax re­duc­tions and reg­u­la­tory changes.

Due to an ex­pected ad­di­tional drag on global in­vest­ment con­nected to U.S. trade pol­icy un­cer­tainty, the re­port in­cluded slightly lower pro­jec­tions for ex­port growth in 2017 and 2018 com­pared to the bank’s ear­lier pre­dic­tions.

The bank also pointed to the U.S. trade-pol­icy un­knowns, and the fact it now ex­pects them to drag on longer than ex­pected, in its de­ci­sion to re­vise down its pre­dic­tion for busi­ness in­vest­ment in 2017.

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