Statistics Canada will reveal Wednesday just how fast the country’s economy is growing right now, but even a barnburner of a number is unlikely to get the Bank of Canada to nudge up interest rates before next year.
An interesting gap is emerging between private sector economists, who are staking out bullish positions on Canada’s economy, and the Bank of Canada, which has yet to show any sign that it will hike its benchmark interest rate before 2018.
If there’s an immediate winner from this outlook gap, it may be the beleaguered loonie. Speculators have been roughing up the Canadian dollar due to doubts about U.S. crude oil prices, to concerns over the housing markets Vancouver and Toronto, and to uncertainty over the U.S. administration’s protectionist trade policies. The loonie was the worst performing of the G10 currencies last year, and earlier this month it dipped to 72.50 U.S. cents, its weakest price in more than a year.
A robust first quarter GDP number might help turn the tide. The data is telling the story of a rapidly growing Canadian economy. The average forecast of 21 private sector economists and analysts surveyed by Bloomberg has Canadian Q1 GDP at an annualized rate of 4.08 per cent.
This could inspire currency traders to be ahead of the curve and learn to love the loonie long before the Bank of Canada takes any action. Interest rate hikes tend to bolster the dollar as the higher yield brings in investment.
Beata Caranci and James Orlando of TD Economics say Canada’s economy is absorbing slack faster than expected. This should force the Bank of Canada to raise its policy rate by the second quarter of next year. “Canada’s strong economic performance thus far has been seemingly ignored by financial markets, as concerns about Canada’s housing market and trade clouded the outlook,” they write. “[M]aybe the time has come to buy Canada.”
Canada’s economy is growing fast. Coming into the announcement, private sector economists believe the number will show that Canada’s economy is growing at an annualized rate of four per cent, and that would blow way the pace of growth in the EU (two per cent), the U.S. (1.2 per cent) and Great Britain (0.7 per cent).
Douglas Porter, chief economist with BMO Financial Group, points out that the Q1 growth is not a one-off because it follows average gains of more than three per cent in Q3 and Q4 last year. “With this sustained performance, Canada is now on track to post GDP growth of around 2.5 per cent in 2017, topping our freshly revised-up U.S. call of 2.2 per cent. It’s pretty safe to say that no major forecaster was looking for Canada to outpace the U.S. at the start of this year.”
If there is at least one important observer that still has a fairly muted outlook on Canada’s economic prospects for this year, it’s the Bank of Canada. Last week it decided to hold its benchmark interest rate at 1/2 per cent.
Economists reading the text of the bank’s announcement see nothing in it to suggest the bank will increase interest rates before next year. Export growth and competitiveness challenges remain, the bank said last week. “The Bank’s monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.”
In a note ahead of the GDP release, economists at CIBC said a “booming” report is a foregone conclusion and that the Canadian dollar should benefit.
The report on first-quarter Canadian GDP “will be nothing short of a barnburner,” predicts Avery Shenfeld, chief economist with CIBC World Markets Inc. “These days, a quarterly pace anywhere near our 4.5 per cent projection is a rarity among developed economies, and would have the last six months advancing at a 3 1/2 per cent rate.”