Canada GDP Preview: Canadian GDP is expected to decelerate with slowdown seen temporary

• The fourth quarter GDP is expected to decelerate to 1.2% quarterly annualized rate, down from 2.0% in the previous quarter.
• The monthly GDP in Canada is expected to stagnate in December.
• The Bank of Canada looks firmly committed to monetary policy tightening considering the current slowdown temporary factor.
• The Canadian Dollar is expected to benefit from the corrective move and ongoing policy tightening.

Even with Canadian growth stagnating in December and decelerating to 1.2% quarterly annualized rate in the fourth quarter of 2018, the Canadian Dollar is still relatively cheap to the shift in growth expectations. With the Bank of Canada pursuing its monetary policy stance of gradual tightening Canadian Dollar is expected to re-test its November highs of 1.3050 at the beginning of 2019. 

Canada’s fourth-quarter GDP is expected to decelerate further to 1.2% from 2.0% y/y in the previous quarter with the Bank of Canada is unlikely to alter its policy based on the current slowdown in GDP.

Even with the growth rate slowing down to 1.2%, for the Bank of Canada policymakers, the Canadian economy still operates close to full capacity when overlooking the temporary slowdown effects. After hiking the target rate three times in 2018, the Bank of Canada is still exp[ected to move gradually towards 2.5%-3.5% neutral rate range.

“he Bank projects real GDP will grow by 1.7% in 2019, 0.4 percentage points slower than the October outlook. This revised forecast reflects a temporary slowing in the fourth quarter of 2018 and the first quarter of 2019. This will open up a modest amount of excess capacity, primarily in oil-producing regions,” the Bank of Canada Governor Stephen Poloz wrote in a statement after the January 9 monetary policy meeting.

The Canadian economy is expected to be boosted throughout the first quarter of 2019 and return back to a solid growth trajectory. According to the Bank of Canada, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1% in 2020.