Canada Growth to Plummet in H2

Blink and you may miss it, but the beginning of the end of over-the-top economic growth is just around the corner. That might sound alarmist, but most economists and policymakers are setting the stage for a weaker performance in the second half of 2017 and beyond.

The economy reached a super-sized output spike of 4% between April and June, according to private forecasts ahead of Thursday’s official second-quarter tally. That was preceded by 3.7% growth in the first quarter. But don’t rely on that run extending through the remainder of this year, let alone into the next, Canadian Press reported.

Higher interest rates from the Bank of Canada in July, taking its key lending level up a quarter point to 0.75%, and the possibility of another hike later this year could crimp some borrowing and investment activity. But that will be more by design than economic happenstance.

“In starting to raise rates, the Bank of Canada is judging that it needs to slow growth to 2% or so to avoid an inflation overshoot down the road,” said Avery Shenfeld, chief economist at CIBC World Markets.

“Higher rates will help cool retailing and home building from the recent pace, and even with a target for more moderate growth, we will see some offsetting improvement from business and government capital spending. (But) there is a risk of piling on. Canada is also looking at a further tightening in mortgage regulations to slow housing, and we don’t want to risk turning  a cooling into a deep freeze,” Shenfeld said.

"For that reason, after a hike in the next few months, the Bank of Canada is likely to pause for a half year or so to see how things are evolving.”

Lending and Spending

Despite tighter lending regulations, household spending remains king in Canada. But there are now more contenders for that title–exporters and business investors, among them.

Down the road, “residential investment is anticipated to contribute less to overall growth,” the central bank said in announcing its July rate hike. “Macro-prudential and housing policy measures, as well as higher longer-term borrowing costs resulting from the projected gradual rise in global long-term yields, are all expected to weigh on housing expenditures.”

Meanwhile, spending by companies, long criticized for not putting enough of their post-recession cash to work, will likely heat up along with exports, “triggered by expanding economic activity in both the non-resource and resource sectors,” according to a statement by BoC. “The expansion in the resource sector indicates that the adjustment in the level of investment in this sector in 2015 and 2016 to the past oil price shock is largely complete.”

Craig Alexander, senior vice-president and chief economist at the Conference Board of Canada, said monetary policy, fiscal policy and the Canadian dollar “have all contributed to the very strong pace of economic growth we’re having this year.

 “And as we move into next year, the appreciation of the Canadian dollar that we’ve been seeing, a smaller increase in fiscal stimulus and a modest rise in interest rates–all of those factors–will contribute to a moderation in Canadian economic growth to something that is still very healthy and close to its long-term trend,” Alexander said.

Roughly one third of Canadians think the BoC’s most recent interest rate hike will hurt their finances, just as nearly three-quarters say their living costs have increased over the past three years, according to a new poll.

The survey, by Forum Research, found that 34% of 1,150 respondents said that the central bank’s most recent 0.25% rate increase “will have a negative impact on their finances,” with 12% saying the effect will be “extremely negative.”

“A considerable number of Canadians are concerned about what the rate hike will do to their finances and they’re overwhelmingly in the middle categories,” Forum Research analyst Gary Milakovic said.

Meanwhile, the Canadian dollar has enjoyed a stellar run this year against the US dollar, but the currency may be approaching its limits, according to a new note by CIBC World Markets Inc.

“We could see another brief foray below 1.25 on Canadian dollar, but in terms of anything sustainable, the best days for Canada’s currency will soon be behind us, “ CIBC analysts wrote recently.