Rate hikes? Not so fast

Despite repeated warnings that interest rates may rise sooner than many Canadian consumers expect, at least one economist says recent GDP data will give the Bank of Canada reason for pause.

“We see the Canadian economy slowing a little bit. I think we’ll see changing composition in growth; we’ll see less consumer, less government, [but] more business investment,” says Benjamin Tal, managing director, CIBC.

“Although the economy is getting closer to full capacity, I think it will be very difficult to see growth over 2% for a sustainable period of time.”

The biggest challenge facing Canada in 2013 will be fiscal tightening by the U.S. government, which will drag on the American economy overall.

“We need the consumer and business in the U.S. to start spending in order to compensate for the negative [contribution] from the government,” Tal says. “We need to see investment rising and the consumer waking up, because come 2013, the government will be a significant negative.”

Fortunately, he says, consumer spending has started to pick up in the U.S. Meanwhile, Canadian GDP recently surprised to the downside.

“The Bank of Canada was talking about closing the output gap, hinting that they would raise interest rates later this year. Maybe the Bank of Canada is a bit optimistic about the rate of growth in the Canadian economy.”

He says the Bank may now be reconsidering the timing of rate hikes, and when they do come, he says they may be more gradual than previously anticipated.

“We have to be careful not to start raising interest rates prematurely,” he says. “We’re going to have a significant fiscal drag from the U.S. and also from Canada—for the first time in a few years the government will not be a positive.”

Unlike the American consumer, spending in Canada is slowing, along with credit growth.

“You won’t have too many engines of economy growth to support any significant increase to interest rates any time soon.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.