Economists differ on timing of potential 2018 rate hikes

Canada’s GDP expanded for the third month straight in January, with gains reported in 15 of 20 major industries.

The 0.6% uptick was the best monthly performance in at least five years, excluding last June’s post-wildfire pop-back, says Brian DePratto, senior economist at TD, in an economics report.

TD is forecasting 3.4% GDP growth for the first quarter, putting Canada on track for the strongest yearly start since 2013.

Read: These 3 provinces will lead in 2017

Avery Shenfeld, director and chief economist at CIBC Capital Markets, cautions in a weekly economics outlook report that while consumer confidence continues to look healthy, forecasted capital spending by business looks weak. “That could reflect uncertainties on Canada’s trade position given upcoming talks over NAFTA, the damage that would be inflicted by a U.S. border adjustment tax and the edge that American companies might get from lighter regulatory costs,” he says.

Read: Future of private investment depends on direction of monetary policy

Though TD says Canada’s positive economic data will likely feed through the Bank of Canada’s forecasts, the monetary policy rate isn’t likely to be raised from its current 0.50% level until late next year, considering comments made by the Bank’s governor last week.

“The governor pointed out that the past three years have seen several bouts of improving economic data, but none have yet proved persistent,” says DePratto. For example, Canada has more economic slack than does the U.S.

“The output gap does not appear likely to close any time soon,” he says, referring to how far behind the economy is relative to its potential path, or where it would be in the absence of shocks. A negative output gap tends to be associated with a lack of inflationary pressures.

“While the output gap is inherently unobservable, still-soft underlying inflation, as measured by the Bank of Canada’s three core inflation measures, suggests that it remains below zero,” says DePratto.

Thus, “the most likely outcome remains a Bank of Canada that holds interest rates at 0.50% well into 2018,” he says.

In an economics report on the Canadian economy, Andrew Grantham, senior economist at CIBC Capital Markets, compares the strong growth within manufacturing, wholesaling and retailing to that seen for the same period last year, which wasn’t sustained. Growth in November 2015 to January 2016 was the result of mild weather that saw some activity pulled forward from the spring. But that will be less of a factor this time around, he says. Also, sector growth is now more broad-based, while last year the auto industry played an outsized role.

Read: January retail sales ‘on fire’

Shenfeld says that if the risks, previously mentioned, to Canadian trade don’t bite too hard, Canadian economic data will be good enough “to put the dent from oil’s drop in the rear-view mirror.” He notes that the Bank of Canada cut rates 50 bps in response to crude’s 2014-15 decline. “The calendar for reversing those cuts will be moving up into early 2018 if the trade issue goes well, if not sooner,” he says.

Read the TD report here. Read the CIBC report with Shenfeld’s comments here, and the report by Grantham here.

Staff

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