National Bank of Canada Eco. & Strat. Team
National Bank of Canada

Monthly Highlights: US GDP growth forecast lowered

ANALYSIS | 06/05/2015 09:28:49 GMT

Highlights

Global manufacturing took a breather in the first quarter of 2015 due to weaker trade flows, the latter impacted partly by temporary factors. As those factors dissipate, export-centric emerging economies should bounce back and together with a strengthening OECD will help support global growth. However, downside risks to the world economy should not be underestimated, including elevated USD-denominated debt outside of the US and the impact of Fed rate hikes in emerging economies.
A worse-than-expected start to the year for the world’s largest economy had us lower our US GDP growth forecast for 2015 by three ticks to 2.6%. That said, fundamentals for domestic demand remain strong with a solid labour market helping lift consumption, the main engine of growth. The Fed remains on track to hike interest rates later this year, but don’t expect it to get aggressive when it starts tightening. The strong U.S. dollar is not only hindering exports, but is also making it more difficult for the PCE annual inflation rate to reach the Fed’s 2% target.
After an awful Q1, Canada should bounce back as exports recover in synch with better US growth. That said, the second half of the year may not be as good as assumed by the Bank of Canada considering some of the impacts of the oil shock may be back-loaded e.g. investment spending. A likely moderation in housing and consumption won’t help either. Given how overall growth will be dependent on trade, the central bank will do what it can to keep the Canadian dollar grounded.

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