Robert Kavcic, Senior Economist at BMO Capital Markets, notes that the Canadian economy posted solid 3.5% GDP growth in Q3, ahead of the consensus call and fully three ticks ahead of the Bank of Canada’s latest Monetary Policy Report forecast (with a positive revision to Q2 to boot).
Key Quotes
“Consumer spending was firmer than expected at 2.6%, the best in a year, and combined nonresidential and M&E investment rose for the first time since the oil-induced downturn began in 2014Q4. Notably, we’ve yet to see any impact of Federal stimulus spending show up in the growth figures. With a strong September handoff as well (+0.3% in the month), we see growth holding in at a solid 2.0% in Q4, and have revised our full-year 2016 call a tick higher to 1.3%. The bigger picture here is that the worst of the oil price shock appears behind us, and stimulus spending is still coming down the pike.”
“Against that rosier backdrop, the Bank of Canada looks to be firmly on hold this week, with the latest run of data quashing any expectations for a near-term rate cut. After leaving the door open for further easing in the prior statement/press conference, Governor Poloz mused this week that it would take a significant departure from the BoC’s inflation outlook to consider more stimulus. Specifically, he hinted that the Bank will be eying smoothed out Q3-Q4 growth of “around 2%” (for the record, the latest MPR had average H2 growth pegged at 2.35%). With this week’s report and our call for Q4, the economy should comfortably be able to hit that mark.”
‘That said, the Bank remains in absolutely no rush to tighten, and we continue to see it on the sidelines through mid-2018. For one, there is plenty of uncertainty surrounding the precise policy tack of the incoming administration south of the border, particularly with respect to fiscal stimulus and trade. But, from the Bank’s perspective, Poloz highlighted this week that “we only incorporate actually announced policy changes, and there haven’t been any of those” (i.e., that will be well into 2017). Meantime, the inflation backdrop continues to soften, with core inflation slumping to 1.7% y/y in October, the lowest level in more than two years. In that environment, and with the output gap likely to remain open through mid-2018, the Bank of Canada looks firmly on hold.”
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