Give or take a decimal point or two, the Bank of Canada and economist market watchers generally believe that Canada’s economy will grow by 2.5% this year and next, an outlook the central bank should confirm on Wednesday.
Revisions will be made in a new quarterly Monetary Policy Report to estimates made in January, since both economic growth and inflation have risen by somewhat more than had been expected. But analysts see the Bank Wednesday morning holding to its neutral bias for the Canadian outlook. The BOC would want to see more months of data before shifting to rate hiking expected to start in Q1 next year, in some minds, or later in 2015 according to others.
The Bank, at 10:30 a.m. ET Wednesday, will release a new policy interest rate decision. The unanimous view of analysts is that there will be no change in a rate held steady since September 2010 because the economy still seeks real recovery in exports and business investment.
Also, a new Monetary Policy Report will survey the Canadian and foreign economic scenes and pronounce the outlook not much changed – 2.5% growth estimated for both 2014 and 2015 – despite some recent upticks in economic indicators, analysts tell MNI.
In a North American winter marked by extreme cold and blizzard conditions, growth perhaps could have been better than the latest Statistics Canada data, with GDP up 0.5% in January after a 0.5% decline in December. Employment grew by 43,000 jobs in March and the unemployment rate dropped one tick to 6.9%, but that only reversed a previous decline and was only among youth, in an accounting notorious for its volatility. And concern about too-low-for-too-long inflation might have lifted slightly, with it probably rising since the latest data, which was an annual rate of 1.1% for total inflation and 1.2% for core inflation in February.
Inflation will spike higher for the present months, because of weather-related declines in fruit and vegetable production in the U.S., analysts said, and because of large price hikes in beef and pork prices. Retail beef prices are up by the largest amounts in a decade: the cost of feed has soared because of prolonged drought in the U.S. mainly resulting in huge culling of beef cattle. Pork prices are up markedly because of millions of piglets killed in North America from porcine epidemic diarrhea, brought in from somewhere outside, perhaps China. So the Consumer Price Index likely will rise, but perhaps temporarily.
“There has been some improved data since the Bank’s January MPR,” Craig Wright, chief economist for Royal Bank of Canada, told MNI. “But in the overall growth story, I don’t think they (the new data) have moved the needle, if you will.”
“We have seen these false starts before,” Wright said. “So at RBC we see little change in the overall view and the Bank of Canada can maintain its expectation of 2.5% growth this year and next. That’s very close to the RBC expectation of 2.5% growth this year and 2.7% growth in 2015. We see only minor decimal point changes in outlook, if any.”
Agreement comes from Avery Shenfeld, chief economist at CIBC World Markets. “It is too soon to expect the Bank to move away from its neutral stance,” he told MNI in an e-mail response to questions.
“Governor Poloz and his team will want to see a few more months of data to confirm that inflation is moving up from its lows before making that shift,” Shenfeld said. “Look for a shift to a mild tightening bias by this fall, but even then, it will be counched in language that suggests a hike isn’t imminent.’
Krishen Rangasamy, senior economist at National Bank, said in an interview that the extreme weather had skewed monthly data and there will be increases to follow, as well as CPI increases because of the drought and animal sickness regimes, but they will be temporary.
“Nevertheless,” Rangasamy said, ” the economy is improving and the excess slack in the economy is closing fast.
“The BOC will not tell you that, but we see the stage being set for rate hikes starting in the first quarter next year and going to the 2% target in four 25 basis point hikes by the end of 2015.”
Aron Gampel, deputy chief economist at Scotiabank, told MNI that “the underlying fundamentals in the economy have really not changed. We see some improvement, with the Canadian economy piggy-backing on the United States economy, and it will be interesting to see how the Bank sees global rcovery, whether it is on track and can boost Canadian exports.”
Right now, Gampel says, “to a great extent, the Canadian economy remains on the soft side, and inflation remains at a relatively low ebb. I’m sure people will be looking closely whether the Bank moves from its neutral policy, but I can’t see it.
Always a bear on the Canadian economy, and continuing to predict a 25% plummet in the housing market over an undefined period of time, David Madani at Capital Markets’ Canadian headquarters in Toronto said in a report to clients that despite the sharp March decrease in housing starts in Canada, to 156,823 units 190,639 in February, trouble still looms.
“The domestic implications in terms of construction activity and employment haven’t been felt yet,” he wrote. “Housing under construction will decline materially later this year and next, resulting in increasing job layoffs in that sector and others that heavily depend on it.”.
Nine economists meeting last week as a monetary policy council for think tank C.D. Howe Institute, wanted the Bank to maintain its 1.0% rate on Wednesday and again at the following setting date, June 4. For further on, seven still favoured maintaining the rate unchanged at the October 22 setting, while two wanted an increase to 1.25%. On the whole, this group was “cautiously positive” about the economic outlook for Canada, but only for “mediocre” growth.